Gas futures climbed to their second highest settlement ever onFriday and appear poised to make that final push this week to theplace where no near-month contract has gone before. What will lifebe like if near-month futures rise above $4.60 (or $4.62, if youuse the prior Nymex Access high of December 1996)?

“The volatility is still in the market so you’ve got to thinkthat the market can trade some pretty wide ranges like it has beenrecently,” said Tom Saal of Pioneer Futures. “It’s probably notgoing to just stay there [once it goes above $4.60]. It’s probablygoing to test even higher levels. I think it will just move inquarters, dimes and nickles once it gets above that area,” he said.

July gas futures on the New York Mercantile Exchange started outon the downside Friday reaching a low of $4.415, but reversedcourse about 11 a.m. and posted a high of $4.580 before fallingback to the high $4.40s in afternoon trade. It ended the day at$4.488 up 2.5 cents from the prior day’s settlement. August was up3.6 cents to $4.458 and the December contract ended at $4.530, upsix cents from Thursday.

Saal predicts traders have the incentive to push the Julycontract to new heights this week. “If you look on a daily chart,[technical momentum indicators] tell you it could go higher,” hesaid. “If you look on a weekly chart, it looks definitelyoverbought now, and has been for about two months, but the marketjust keeps going higher. Outside of the fact that these are veryhigh prices compared to any historical reference, right now thetrend is your friend” and it’s moving on up, he noted.

Technically once the market broke out from that $3.25 area lastmonth, it de-coupled itself from history because it’s never beenthis high in the summer time. Now a new pricing structure isdeveloping. The question is, can it be sustained. “The answer isyeah,” said Saal. “The sticker shock has definitely worn off thismarket at these lofty levels.”

People are still having to buy gas at these levels because theyare worried about prices going even higher, noted one marketer. “Ithink what you have here are competing interests for bothshort-term AC loads by utilities and non-utility generators, andthey can sell power in a peaking market and afford to pay more thanthe gas prices we’re seeing on the screen,” he added. “On themargin, these guys can push up the price.”

There’s also the complete lack of arbitrage opportunity forstorage capacity holders, and “that’s why you are not seeing a lotof gas going into storage right now.” The winter months still haveplenty of room to grow, according to some observers.

“I think the winter contracts are still undervalued compared tothe rest of the market,” noted Kyle Cooper of Salomon Smith Barney.”That will probably keep injections low and near-term pricesrelatively high. I’ll remain bullish until we exceed 99 Bcf in[weekly storage injections]. My gut tells me” next week’s storagereport will show less gas was injected than the previous week, hesaid.

“I don’t know about Monday, but I think sometime next week we’lltest the $4.60-4.62,” said a futures analyst. “These are thehighest prices that we’ve seen since ’96. You’re probing the $4.50to $4.60 area pretty good right now, and even though you kind ofsold off each time after you’ve come in and traded this area, themarket has revisited this area now for the third time in the pasttwo weeks. The $4.488 settlement is the second highest settlementever,” he noted.

From a fundamental perspective, the market is waiting to seewhat happens to the cash market once really hot weather blanketslarge gas consuming areas, including the Southeast, Texas, theMidwest and the Northeast, said the analyst. “We’re seeing what’shappening out West, but I think the market wants to see whathappens when we get some really good solid demand from [widespreadpeaking] AC load.”

The National Weather Service said in Friday’s six- to 10-dayoutlook that it is expecting above normal temperatures over theentire eastern two-thirds of the country. “That about does it rightthere. I think when we get some hot weather and can test how muchgas demand is generated and how cash prices go, then maybe we’llsee that the market can respond without a glitch and maybe thatcould be it. It’s a wild market, said Saal.”

©Copyright 2000 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.