The gas futures market toppled its Berlin Wall last week, atechnical downtrend that has confined trading since December 1996.A number of fundamental factors, including tightening supply,peaking cooling demand and some very significant technicalindicators, conspired to boost the near month contract up 34.1cents to $2.528/MMBtu and the 12 month strip up 19 cents to $2.61from the previous Friday.

“I’ve got to say on a short-term basis we were a littlesurprised by the magnitude of this move up,” said John Saucer ofSalomon Smith Barney. “[Thursday] was kind of a wow, but [Friday]was kind of what you would expect. Anytime a market breaks out ofrange like that with that type of range expansion and at that typeof volume, it’s pretty impressive.” On Friday, Nymex gas futuresvolume for the Henry Hub contract set a new record with anestimated 198,806 contracts. The previous record of 168,057contracts was set Sept. 26, 1997, nearly two years prior.

Clearly there was a general realization last week that bullishmarket fundamentals and technical indicators were aligned. On thefundamental side, “I think people are now recognizing the market isa couple of Bcf/d tighter than last year,” said Saucer. “Theaverage size of the gas market is about 60 Bcf/d so taking 2 Bcf/dout of the market causes a huge change at the margin. I thinkpeople are a little bit more concerned about the winter.”

The price gains were not limited to the front months. In fact,the 12-month strip went up 15 cents in two days Thursday and Fridayto $2.60. “This is not just a short squeeze on the front end,” saidSaucer. “It’s a market where the whole curve is moving up. Thewinter contracts are quickly closing on $3. You have Januaryhitting $2.90 and December in the high-$2.80s. I think thefundamentals will be extremely tight even if we just have a normalwinter. I’m not going to suggest the highs will occur during thewinter. You may see them sooner than that. Concerns about thewinter may yield highs long before they are dealing with thewinter.”

Although few if any observers predicted the launch that occurredon Thursday, there were quite a few bullish factors that presentedthemselves early last week. Crude oil futures played a supportingrole in the rebound despite falling off late in the week. And thehot weather and record power demand triggered significant energymarket jitters.

Many of the nation’s largest power utilities hit demand records.Chicago-based ComEd reached all-time peak demand of 19,940 MW at 4p.m. Thursday, beating Wednesday’s peak of 19,714 MW. Powersend-out records also were reported by Dayton, OH-based DPL Inc.,and Columbus, OH-based American Electric Power. AEP said its threemillion customers in seven states set a new summer load of 19,795MW. North Carolina-based Duke Power customers set a demand recordwith 17,982 MW Thursday after a record the day prior of 17,683 MW.Cinergy and PJM power prices were astronomical at between$350/MWh-$750 MWh.

Meanwhile, most eastern gas cash prices started the week anickel higher. By Wednesday Henry Hub was a dime higher than theprevious Friday and by last Friday had jumped well into the $2.40s.New York went from $2.38 to $2.60 Friday (July 16) to Thursday(July 22).

“You come into this week and you have hot weather, super strongpower prices, gas cash market prices above index, and that lays theground work for a strong start. Then you have a technicalcomponent,” said Saucer. On Thursday, the August contract gappedhigher at the open and then pulled back. After being unable to fillin the chart gap, it easily held the low-$2.30s. At that point, asudden and tremendous amount of buying occurred. “A lot of it mostlikely was short covering, and that carried us all the way to $2.40Thursday,” said Saucer.

A futures technician with New York-based Trot Trading Corp.agreed the rally was fueled by short-covering, but said the battlewas decided earlier in the week when sellers could not retest the$2.10 low from July 12. “There was hardly anyone willing to sellthe market from $2.11-2.17 and that enabled long-term buyers topush their orders higher with confidence,” he said. Long-termbuyers represent a combination of commercial and speculativetraders who attempt to capitalize on trends rather than dailymarket moves.

“Locals tried and failed three times last Friday, Monday andTuesday to push the market past $2.25,” a Gulf trader added. “Notuntil [Wednesday] was the market able to punch through stubbornresistance there.”

On Thursday, there was a major price-range expansion, whichoccurred on a high-volume of trading with over 100,000 contractschanging hands. “It wasn’t some thinly traded day,” said Saucer.”The sharp rally came on very brisk activity. You would expect tosee some upside follow-through just on the technicals alone, butthen cash broke to $2.45-2.46 [Friday] morning. We had a gap on theopen and this thing was on a tear.”

On Thursday, the contract crossed a major technical threshold atabout $2.38, breaking a downtrend that has existed on the futurescharts since December 1996. Prices escalated from there in waves.”I think [Friday] there were a lot of people who were selling theinitial push up to $2.49,” said Saucer. “They thought ‘oh $2.50,that’s a pretty good number; It’s already too high, blah, blah,blah. Cut it short.’ Then the market came off to $2.43-44. But itwent right back up, and guess what happened when it crossed $2.50?They were covering their shorts, and their buying helped push it to$2.55. The same thing happened this afternoon at $2.55; peoplestarted selling it, and it sold back down to $2.50. But guess what,it bounced back and made new highs at $2.58. I think people havebeen trying to sell this because they have been thinking it’s toohigh, but that’s always a relative way of looking at the market.Gas can trade anywhere to $1.05 to $4[-plus].”

Despite the major price increases late last week, tradersremained in disagreement on the market direction prior to theexpiration of the August contract on Wednesday. Some feel it mightcool off as traders take profits into the settle. However, TimEvans of New York-based Thompson Global Markets believes it is toosoon for this rally to fade. He believes the futures market mighttry to repeat the past.

In order to try to pin down a potential top for this rally,Evans takes a look back to the week ending March 19, when pricesbegan to climb from a $1.67 low. By the end of April, prices hadcompleted a 74-cent move to notch a $2.415 high. “Add that to lastweek’s $2.10 low and you’re talking about a potential for themarket to rally to the $2.84 level,” he said.

Evans said if the buying power was there once, it will be thereagain. “Although the market is now statistically overbought in theday market, the speculators are not even close to the maximumamount of long positions they will hold,” he said.

Saucer wouldn’t make any specific price target predictions. “ButI would tell you to go back and look at what happened in 1997during the exact same period of time. 1997 has pretty much been amirror image of this year, both in the ups and the downs, basicallyfrom the first quarter until now,” he said. “It’s really prettyamazing. In August 1997, it went ballistic and traded well above$3.

“If you’ve got good fundamentals and good technicals and thefunds are buying” the sky’s the limit. “[The speculative funds]certainly still have room to buy. Whether they are now still short[is questionable], but remember between February and May they wentfrom being short to being long 50,000 contracts. They certainlyhave the wherewithal to buy a lot of contracts. As of last Tuesdaythey were short 10,000, so if they rebuild their long positionthat’s a lot of buying.”

Rocco Canonica, Dexter Steis

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