January natural gas futures posted a double-digit loss Monday as traders acknowledged a low volatility price environment and little incentive for end-users to step up to the plate and lock in prices. At the close January was down 12.3 cents to $3.461 and February also had shed 12.3 cents to $3.490.

The implied volatility is incredibly low,” said Ed Kennedy, senior vice president at INTL Hencorp Futures in Miami. He queried, “So why aren’t the utilities utilizing options? It’s because prices are so low they are comfortable locking in the fixed-price deal.”

“They’ve got everything on for this winter and are looking at calendar 2013 and 2014, and rather than pay the time value [of the option], they are saying the heck with it, the downside is limited. If the market goes lower, I’ll do another traunch [purchase] at lower prices.”

In Kennedy’s view the way to speculate in the market was with the options since they are so cheap, but “longer term [utilities] are looking at the price action of 1992, and saying, ‘What problem do I have locking in these prices?'”

During 1992 spot futures ranged from a low of $1.04 to as high as $2.74 before finishing the year at $1.69.

His calculations showed that a calendar 2013 $5 call option was about 48 cents. “Why pay it? The underlying futures are $4.35,” Kennedy said.

Giving tips and teaching people how to use market tools to their advantage in today’s market, Kennedy and his colleague Tom Saal will be holding their popular “Where the Market is Going and What Can You Do About It?” seminar this Wednesday through Friday in Chicago. Visit https://seminar.intelligencepress.com/Hedging2011/ for more information.

The low volatility and implicit lack of trading opportunities may have been at work as funds and managed accounts reduced holdings of both short and long contracts, according to the latest government report. The Commodity Futures Trading Commission in its Commitments of Traders Report for Nov. 29 showed declining open interest at both major exchanges.

At the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) held by managed money fell 20,555 to 291,390 and short positions fell by 48,561 to 174,455. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) fell 911 to 130,581 and short contracts declined 4,954 to 269,586.

When adjusted for contract size, long contracts at both exchanges fell 5,975 and short futures and options declined by 17,094. For the holiday-shortened trading week January futures rose 7.2 cents to $3.633.

Analysts see the natural gas market on the receiving end of relentless selling. “Any rally in the natural gas market has been met with heavy selling. The unseasonable warm temperatures have prevented the usual bump in natural gas prices during winter months,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

DeVooght noted that the December settlement of $3.364 was a whopping 90 cents lower than the comparable December 2010 contract. The bullish gas storage report last Thursday showing a draw of 1 Bcf was able to push the January contract up to$3.689, but that didn’t hold and Thursday’s 9.8-cent gain was nearly erased by Friday’s 6.4-cent decline. “On a trade basis, we will hold our current positions,” DeVooght said in a weekend note to clients.

DeVooght currently counsels producers and physical market longs to hold the balance of an earlier November-March strip consisting of $4.75 puts offset by the sale of $7.00 calls for a 16- to 20-cent debit.

Unfortunately for the bulls selling may just continue as temperature forecasts call for above- to much-above-normal temperatures for the northern half of the country. Forecaster WSI Corp. of Andover, MA, predicts in its six- to 10-day outlook above-normal temperatures north of a line from South Carolina to southern Oklahoma, including Nevada and Southern California. “Above-normal temperatures are expected to encompass most of the northern tier of the country, below-normal readings are anticipated over most of the southern tier of the country. Anomalies are generally expected to average between [three to seven] degrees above or below normal, respectively.”

It added that Monday’s forecast is warmer over the northern tier of the country than its previous forecast and risks to the forecast are that “temperatures may trend warmer over most of the eastern two-thirds of the country than currently forecast. Medium-range models depict a more zonal pattern becoming established over North America next week and suggest mild Pacific air will once again flood the northern tier of the country.”

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