After a one-day breather Friday, the natural gas futures market continued its blistering pace of advance Monday as fund short-covering was augmented by private forecasts suggesting the final 10 days of the month will see another blast of Arctic air. An increase in Nymex margin requirements was also seen as a contributing factor, intensifying the urgency for shorts to cover their positions.
By virtue of its 76.7-cent increase and $6.902 close, the January contract is trading at new highs. Moreover, by cresting above the $6.625 continuation-chart high notched in June, the January contract achieved new, nine-month, prompt contract high Monday. Estimated volume at 102,667 was up from Friday’s session and was evidence the funds were back in action Monday.
“Houston, we have lift-off,” said Ed Kennedy of Commercial Brokerage Corp. “Not only was the weather colder than expected over the weekend, private forecasters are now calling for below-normal temperatures for the last third of the month.”
According to Pennsylvania-based Accuweather, daily high temperatures in Washington DC, Philadelphia, New York, and Boston will warm to near 50 degrees by Wednesday and Thursday, only to crash back to normal and below normal readings by early next week. And while forecasts from a private weather forecasting firm like Accuweather may not have amounted to much a year ago, they have achieved elevated status following the less than stellar track record put in by the governmental forecasting agencies over the past 12 months.
The National Oceanic and Atmospheric Administration, and its short-term forecasting arm, the National Weather Service, have both failed repeatedly to predict winter weather with any accuracy over the past 12 months (see Daily GPI, Dec. 3). A case in point is this past weekend, which according to the NWS’s six- to 10-day forecast was expected to see above-normal temperatures. As it turns out, up to four feet of snow fell from Washington DC to Maine, with temperatures dropping near zero for parts of Northern New England.
However, weather was just one of the ingredients in Monday’s 12.5% spike. Also at work was short-covering by those parties looking to avoid a margin call. On Friday the Nymex said that effective at the close of business Monday, it would raise margin requirements on the spot through third months of the standard-sized futures contract to $7,000 from $5,000 for clearing members, to $7,700 from $5,500 for members, and to $9,450 from $6,750 for customers.
“A fairly big disincentive to be short,” issued Kennedy. “Longs are immune to the margin call because they are likely in the money, but if you’re short you’re either covering or paying up.”
For possible insight on what the futures market might do next, it is interesting to look back at the two previous times the market soared to such heights. In both December of 2000 and February of 2003, the prompt contract gapped dramatically above the $7.00 mark en route to highs at $10.10. And while the market’s ability to accelerate higher on past forays to current levels is compelling, it is fair to note that in both of those cases the market had worked its way higher in a more methodical manner. Few would consider the $2.00 price hike in just six trading sessions levels methodical and most look for a consolidation lower this week.
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