November natural gas futures rocketed higher Monday in active trading as traders fixated mostly on higher crude oil prices in the adjacent trading ring. Funds and managed accounts eager to protect large short holdings did not emerge to defend their position until late in the trading session. November futures gained a hefty 47.1 cents to $7.445 and the December contract added 33.1 cents to $8.012. November crude oil vaulted $2.44 to $86.13 after trading as high as $86.20, a record.
“The market followed crude oil and traders in the ring were long and kept pushing the market higher,” said a New York floor trader. He noted that funds and managed accounts were “very good sellers at $7.42 to $7.435 and they may have been a little short and didn’t want prices to get much higher than that.”
Short indeed. Data released Friday from the Commodity Futures Trading Commission’s Commitments of Traders Report showed that as of Oct. 9 noncommercials, typically large speculative holdings, held a whopping 61,484 contracts net short.
The natural sellers of gas, the producers, are playing a wait and see game. “We haven’t seen much producer hedging at all in natural gas,” said George Ellis, director of energy with BOM Capital Markets in New York. He added that natural gas prices in spite of Monday’s titanic advance were still locked in a range and “we really haven’t seen a breakout of that range. I think it would take $9 to $10 to get them to hedge, and at that point they would be very motivated,” he said.
He noted that from a producer perspective prices “are a lot higher than they thought they would be with relatively mild weather and virtually no hurricane season, and they are saying we’ll let the market play out and see how much further it will advance.”
Ellis also noted that with the anticipated January 2008 arrival of gas deliveries from the Rockies Express pipeline expected to bring heretofore captive Rocky Mountain gas to Midcontinent points that “some of the Appalachian producers are worried about the basis, but they see no macro adjustment to overall prices.”
Other traders are also awaiting a more opportune time to sell. Higher crude oil prices, a fear of tropical storms and uncertainty over winter weather have kept supply bears on the defensive. “This has given the market an opportunity to trade sideways in a 80-cent range for the past four weeks. On a trading basis, we continue to hold short positions and look to add on to short positions with winter rallies above $8.00,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.
Currently DeVooght counsels end-users to stand aside the market, and producers should hold short a winter 2007-2008 strip at $9 for 15% of production. He advises increasing the short winter strip as prices rise to 50% of production,and establishing a short hedge for 10% of next summer’s production.
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