The Fourth of July may have been last Tuesday, but pyrotechnicscontinued for the rest of the week in the natural gas pit astraders pushed prices lower Wednesday in sympathy with a 6% drop incrude oil prices, only to retrace a portion of those losses in ashort-covering buying spree Friday.

The August contract finished at $4.262, 19.6 cents higher on theday, but 21.4 cents lower for the week.

Following two days of exceptional volatility last Wednesday andThursday, many traders figured the market would calm down ahead of theweekend. After all, the market had already digested a $2 drop in oilprices, a neutral storage report, and a pipeline rupture in the Gulfof Mexico. What else could happen? No sooner had traders asked thatquestion then they had received their answer — the EnergyInformation Administration released its July 2000 energy outlook earlyFriday afternoon. According to the EIA, the current levels of gas instorage paired with the sluggish rate of injections may lead toinadequate supplies this winter (see relatedstory in this issue).

The reaction to this report was felt first in the winter monthsas traders propelled the November through March strip intodouble-digit gain territory. The prompt month eventually caught on,and it too bubbled higher throughout the afternoon. In a rareoccurrence of the out-months trumping the prompt, Friday’s winterstrip gained 20.1 cents while the August contract advanced only19.6 cents.

“The winters have been undervalued for some time,” said EdKennedy of Miami-based Pioneer Futures. “It was only a matter oftime before they rallied.”

A contributing factor in Friday’s rally, several sources agreed,was short-covering by discretionary fund traders, who had sold intoWednesday’s price slide and then again when the August contractdipped below its 40-day moving average Thursday.

Discretionary fund traders differ from other fund or speculativenon-commercial traders in that there is an actual person making thedecision to buy and sell and not just a computer model. Because ofthat, discretionary funds may be able to enter or exit the marketmore quickly whereas a non-discretionary fund will trade only aftera more rigorous set of technical parameters is satisfied. Forexample, some non-discretionary funds will only enter into a newtrade when the 40-day moving average is violated for two straightdays on a closing basis, while a discretionary fund trader willtypically have the autonomy to trade if the 40-day is broken on anintra-day basis.

The August contract closed just four-tenths of a cent below its$4.07 40-day average Thursday, and then quickly rebounded to tradeabove it for most of the day Friday. That average now stands at$4.096 and is moving upward at the rate of several cents per day.

Looking back at the abundance of fundamental and technicalgyrations last week, it is hard to venture a guess as to whichdirection prices will take this week. However, rather than lookingat what the market “did” last week, Joe Lynch of New York-basedRafferty Energy Group asks what the market “didn’t do? We wereunable to break out of the trading range and until we do, you haveto be a seller at $4.34 and a buyer at $4.04,” he said.

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