Natural gas futures traders made it five in a row on Friday as the March contract recorded gains the entire week. Trading action on Friday saw the biggest boost as fears of a cold February pushed the prompt-month contract to settle at $8.301, up 19.9 cents from Thursday and 56.1 cents higher than the previous week’s close.
“It was a big day in all of the energies. Crude was up $3.66 and the products were up almost a dime, so by comparison, natural gas was actually lagging a little bit,” said a Washington, DC-based broker. “I think we finally broke out of that $8.100 to $8.150 area that was capping us, which triggered some follow-on buying.”
He noted that both crude and natural gas appeared to ignore fundamentals on Friday, choosing instead to trade off a breakout of the smaller range. “People are very unsure of what is going on, but they have to make some money, so they figure they will buy at the bottom of the range and hopefully sell it at the top. Now where that top is in natural gas is another question entirely. I think it lies with the $8.400 to $8.500 level. We could see a little more to the upside early in the coming week and then we’ll see if they can sell it off all of the way back down to $7.500. I really don’t see anything right now that can break us out above the recent highs, so I think we are basically still rangebound between $7.500 and $8.500.”
The broker added that some in the industry keep attributing the recent price strength to forecasts of cold, but he is not buying into that argument. “They keep telling me about this cold weather we are going to have, but nobody on the maps or the scientific community seems to agree,” he said. “Yes, it is going to be cold in northern Maine, New Hampshire and parts of Michigan, so rack up those degree days. Population-weighted, it really amounts to nothing. Oh, and by the way, the Mid-Atlantic is expected to see above-average temperatures in the six- to 10-day [forecast], so I don’t really understand the weather argument.”
While the winter season still has a ways to go, some end-users are turning their attention to summer season market exposure. Much electrical power is generated from natural gas, and using natural gas futures and options to hedge increases in fuel costs is getting close attention.
“I have a utility client with upside issues, and I expect them to look at some call spreads pretty soon,” said a California risk manager. He said his company was waiting to implement any strategies because “we are still trading a weather market for winter, and they are looking at the power market for summer.” Call spreads are a relatively low-cost method to hedge upside price risk and involve the simultaneous purchase and sale of call options at different strike prices. By adjusting the strike prices an end-user can balance market exposure.
In the meantime, options trading can offer opportunities when markets seem rangebound. “There’s not much market [activity] going on. It’s in kind of a range. It won’t sell off very much, and we are just getting used to that whole idea. It’s been short-term trading,” he said.
He added that much of his short-term trading utilized options strategies. “It’s been ins and outs. Buy some $8/$8.50 call spreads, buy back the $8.50s on a break [lower], sell the $8s on a rally, then buy some puts against it in case you are wrong, but it is all very tight, within a dollar range,” the risk manager said.
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