If the analysis of a top industry observer is correct, prices still have some room left to move higher, but as the end of the year approaches traders should be prepared to recognize that the high prices for the season may be in.

“I expect spot prices to reach $5 per MMBtu within the next few weeks, and then from there it’s could be all downhill,” says Jim Ritterbusch of Ritterbusch and Associates. At this point the much discussed El Nino isn’t much to deal with, he said.

“The people I’ve talked to say that it’s too early to tell about the El Nino, and the cool November and December temperatures are in line with most of the weather expectations I’ve seen. Industrial demand is sluggish, and the industry will be fortunate to show a 1% increase in total demand. There are too many weather variables to determine a season ending inventory level, but I look for a year end inventory of 2.5 TCF. Weekly average draws of 80 BCF from now until the end of the year are what I expect,” Ritterbusch said.

“The bottom line is that the market will be amply supplied even within the context of a cold winter, and that will limit price advances. Usually the price high will be made prior to year-end and by January the winter is defined.”

Other traders see natural gas as a longer term sale. “I made a recommendation to our producer clients to implement hedging strategies last week, and yes, the market did go up 30 cents after that recommendation,” noted Mike DeVooght, president DEVO Capital Corp., Pagosa Springs, CO. “My analysis is more longer term, and the same thing happened when I recommended a sale on crude oil six weeks ago. Prices advanced for a week afterwards, but then dropped like a rock.

“Our indicators are telling us to be short. The indicators are based on internal price activity, such as front to back spreads, the intermonth relationships and factors of that nature. The basic theory behind it is when the market is advancing the front months lead the way. When the market is declining, they lead on the way down as well. I don’t think there is a better indicator out there than that,” said Devooght.

“On that basis when spot prices were at $4.40 to $4.50, the market was deteriorating and we were watching very closely. Before the indicator we use actually gives a buy or sell signal, the momentum has to shift. This means that sales will not catch the very high, even though the most important part of the indicator is telling us to sell on the highs. We like to wait until the momentum starts to shift. Once we see the momentum shift, we know that prices have already moved a bit already,” he added.

“At that point we are in a ‘sell’ mode and looking for selling opportunities. The momentum shift gave us the signal. You must have the most important things in alignment, the price relationship shift, and price momentum.”

The last week’s jump in prices didn’t phase DeVooght that much.

“A lot of the work we do is out 12 months, and the recent surge didn’t impact the transactions that much. December futures gained 26 cents against the April futures, but the 4, 4 1/2 collars (buying the $4.00 put options and selling the $4.50 call options for the April through October summer strip) only moved 7 cents. These hedges are for the long haul, and it’s necessary to have the discipline to make the trades,” he explained.

(Republished with permission from Bill Burson, https://gastrader.net )

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.