Fueled by a bullish petroleum inventory report mixed with continued buying euphoria from speculative fund accounts, November natural gas futures shot to a new 20-month prompt-contract high on Wednesday. As of 2 p.m. (EDT), the prompt month reached a high of $7.75, a 62.7-cent premium over Tuesday’s settle and 31 cents above the high reached on Oct. 7. It settled at $7.623, up 50 cents.

A bullish petroleum inventory report released Wednesday by the Department of Energy was also seen as fuel for the run-up in natural gas, which gapped higher at the opening bell and easily surpassed the $7.44 mark set earlier this month. The remaining four winter-strip months all posted gains of more than 20-cents, with January and February both venturing above the $9 mark during the day.

The November move followed an impressive advance Tuesday, when the prompt month closed 31.7 cents higher. Not since late February 2003, when low storage inventories pressed prices past the $10 mark, have natural gas futures prices been so high. However, natural gas storage levels are brimming now, prompting observers to turn to other reasons to explain Wednesday’s price spike.

The Department of Energy reported Wednesday that U.S. crude oil inventories climbed by 1.2 million barrels, which registered as the fourth weekly build in a row. However, the figure fell short of analysts’ estimates of two million barrels. The DOE also reported that inventories of heating oil and diesel fell for the fifth week in a row. The report increased fear that supplies might not be adequate as the country heads into winter. As a result, November crude futures hit a high of $55.20/bbl before settling at $54.92, up $1.63 on the day. Heating oil reached a high of $1.5650/gallon before settling at $1.5604, up 5.19 cents on the day.

“Professional speculators, otherwise known as the funds, continue to buy for the third straight day, pushing natural gas prices up to new annual highs,” said Tom Saal, a natural gas broker with Commercial Brokerage Corp. in Miami.

While noting that the petroleum complex’s recent news has probably had an impact on natural gas, Saal said he doesn’t like to “globalize” natural gas. “Once you get away from looking at the market by itself, you start bringing in noise. Sometimes it can be a cause du jour, but it is not something that I can look at over time and say that I feel confident that if I see this kind of information in the oil complex, natural gas prices will go one way or the other.”

The broker said lower stocks of heating oil do not necessarily equate to higher winter gas demand because most homeowners can’t switch fuels. “They are just going to have to pay a lot for heating oil,” he said.

Commenting on the fact that natural gas futures continue to rally higher while natural gas in storage approaches an all-time record high, Saal noted that the gas in storage is actually potential supply. “Until it is withdrawn, it is not real supply,” he said. “I think the market is anticipating that the stored natural gas is not going to come out (of the ground) like Niagara Falls on Nov. 1,” he said referring to the unofficial start date of the five-month winter heating and storage withdrawal season.

“In fact, I think storage operators will probably be a little stingy with that supply at least through the month of November,” he added. “I think that is what has these spread values at all-time highs and prices pushing all-time highs in anticipation of hoarding [of inventories] and of a cold winter.”

Working gas in storage as of the week ended Oct. 8 stood at 3,159 Bcf, according to Energy Information Administration (EIA) estimates. The all-time record storage level is 3,254 Bcf, which was set during the week ended Nov. 30, 2001. Stocks are currently 178 Bcf higher than last year at this time and 211 Bcf above the five-year average of 2,948 Bcf. The industry is looking for the EIA storage report Thursday morning to reveal a build somewhere within the 54 Bcf to 70 Bcf range.

“Remember, this is a futures market,” Saal said. “Everyone knows how much gas we are going to have in the ground. That hasn’t been a mystery for the last couple of months, so that has already been factored in.”

Looking at Wednesday’s rally, Saal said November futures could get to the $8 mark. “Once you get into winter, options have a tendency to increase their importance due to traders with short option positions hedging their positions, which is called Delta hedging,” Saal explained. “As the prices gravitate towards a strike price — say an $8 call option November — people have to Delta hedge and buy futures against their short call option position.”

On Dec. 8-9, Saal will be teaming with his associate Edward Kennedy and Nymex floor trader Sandy “Trot” Goldfarb of Energylinks Futures, LLC. in presenting a workshop entitled “Managing Natural Gas Price Risk.” For more information on the program, which will be held at the New York Mercantile Exchange, visit (https://gasmart.com/workshop).

“I think the key to understanding today’s natural gas market is understanding all of the players, and that is what we will talk about at the seminar,” Saal said. “You need to understand how these professional speculators trade, and by understanding how they trade, it gives you another arrow in your quiver.” He added that the seminar will also explore trading strategies including Delta hedging.

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