Perhaps admitting to a little bit of overzealousness during Monday’s 16-cent rally, natural gas futures traders in overnight Access trading and then again on Tuesday pushed the February contract lower. With non-commercial traders continuing to hold a sizeable net-short position and some market watchers believing that the four-month-long downtrend is still intact, the question now becomes how much longer can the trend continue before it shows signs of cracking.

After reaching a low of $5.93 Tuesday morning, February natural gas futures spent the remainder of the session moving back toward’s Monday’s settle. The prompt month closed at $6.095, down 6.4 cents on the day. As it turns out, Tuesday’s down-then-up trading action was a mirror image of Monday’s price movement. On Monday, the prompt month ran up to notch a $6.55 high for the day on increased fears of colder than normal temperatures in the East, before settling down later in the afternoon to close at $6.159.

“We are still in a downtrend and we haven’t seen any bottom patterns yet,” said Tom Saal of Commercial Brokerage Corp. in Miami. “However, I think within the next month it might be over for the short term.” As for support, Saal said there was some pretty good buying in the $5.70 area.

“One of the things I like to use as a winter benchmark is my estimate of the average cost of gas in storage,” he said. “That number is estimated to be around $5.95. Historically, if you get below the average cost it has been a good buying signal. Coupled with the fact that funds are so short, if we get to some numbers below $5.95 we might see some buying.”

According to the latest Commitment of Traders (COT) report by the Commodity Futures Trading Commission, non-commercial traders on the New York Mercantile Exchange continued to increase their net short positions. The Jan. 7 report showed that funds were holding net-short futures positions of 47,633, significantly higher than the previous week’s 43,663 net short level.

Saal, who has studied the behavior of the non-commercial segment of the market on the price direction, will be joining a distinguished list of speakers and presenters at GasMart 2005 in New Orleans, March 16-18, 2005. He pointed out that on only two other occasions have speculative accounts held such a large net-short position — in late January 2002 (62,643) and then again in November 2003 (52,684). In both instances, the natural gas futures market was in the process of carving out a bottom.

“When the funds got more than 40,000 net-short, the duration on the last two occurrences lasted seven weeks,” he said. “It’s kind of like — how long can you hold a beach ball underneath the water. Based off of historical price levels, these have been buying opportunities.”

Saal noted that non-commercials have now held over 40,000 net short positions for four consecutive weeks. “What everyone needs to realize is that funds do not stay net-short forever,” he said. “It is a limited amount of time. The funds have been your biggest sellers and there comes a time when they reach a saturation point on the short side. They will stay short as long as the market is paying them to stay short.”

But that being said, Saal admits that he still views the market is in a downtrend. “A lot of non-commercials like to trend trade,” he said. “The natural gas futures market has been trending down now for about four months.”

As to the role non-commercials play, Saal said that while they do not control the natural gas futures market, they do push the market to extremes. “Their motive is simply to make money in the market. I think they definitely have value to all of the other traders in the market because they provide liquidity.”

Looking at whether non-commercials are beneficial or detrimental to the market, Saal said he believes that is the wrong question. “The question is not whether they are bad or good for the market, the question is if your trying to make trading decisions, can their position reveal information about the market that will help you in your trading? It’s pointless to argue good or bad.”

At GasMart 2005, Saal will delve deeper into the behavior of the speculators and give you the tools you need to benefit from their presence in the natural gas futures trading pit. Joining Saal to discuss futures market trading and the price level of natural gas are Tom Matthews of Kinder Morgan, Dan McElduff of Nymex and Thomas Lord of Volatility Managers, LLC.

The speakers at the 19th annual gathering of the natural gas industry include: Keynoter — FERC Commissioner Joseph T. Kelliher — and Alexander E. Strawn, Jr., Senior Purchasing Manager, Procter & Gamble; Karl Kurz, Vice President, Marketing, Anadarko Petroleum; Phil Toews, Vice President, Energy Risk Management, Goldman Sachs; Greg Rizzo, Group Vice President, Duke Gas Transmission; Bert Kalisch, President, American Public Gas Association; James Allison, Regional Risk Manager, ConocoPhillips; Elissa Sterry, Planning Manager, ExxonMobil Gas & Power Marketing; Kevin Petak, Director of Energy Modeling and Forecasting, Energy and Environmental Analysis; Richard McMahon, Executive Director, Edison Electric Institute; and John Scarlata, General Manager, Gas Trading & Fuel Supply. Check www. gasmart.com for updates.

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