Successful natural gas futures trading often depends on correctly determining what “story” the market is telling on a particular day, according to Sandy “Trot” Goldfarb, a 20-plus-year trading veteran. Speaking at NGI’s Natural Gas Futures Prices Workshop at the New York Mercantile Exchange last week, Trot said the plot of recent price movements indicates that there could be more room to the upside in this market.

Trot’s favorite tool for reading the futures market is called “Market Profile,” which he compares to a “book of short stories” It’s one of the tools that has allowed him to be “two-thirds right on trades.

“Technical trading using the Market Profile is better than anything,” said Trot.

Market Profile is a method of data entry that creates a more expansive visual picture of the market than that conveyed by conventional bar charts and allows the natural movement of the horizontal time dimension as well as the vertical price dimension to be captured and expressed. When Market Profile data is displayed, it represents the trading day as a distribution of prices turned 90 degrees. Half-hour time periods are displayed by sequential letter sequences which are placed on a vertical and horizontal axis.

Looking at the futures market’s behavior last week, Trot said that trading was important on Thursday when the Energy Information Administration (EIA) natural gas inventory report was released. The EIA report revealed that 73 Bcf was injected into underground stores for the week ended Sept. 29, which was a “bearish number,” so “why didn’t the market go down?” Trot queried. “The market said a lot by what it didn’t do. The market should have tested unchanged, but it didn’t do it.”

In Thursday’s trading, the November contract settled at $6.298, up 30.3 cents from Wednesday’s settlement at $5.995. Trot said that “if the market can hold $6.420, then $7 is the next target.” In trading on Friday, November futures settled at $6.427, up 12.9 cents.

But technical trading also has its limits. A firm grasp of underlying market fundamentals also is a must, and Trot believes that the underlying supply-demand balance for natural gas remains tight, and future supplies in the form of liquefied natural gas (LNG) are not likely to reduce that tightness anytime soon because LNG projects keep getting pushed further back from development.

Another fundamental factor that makes natural gas appealing to traders is the limit to gas storage capacity. This limit plays a key role in the development of a natural gas price curve that reflects the big swing in seasonal supply and demand and facilitates the trading of price spreads.

According to Trot, if there was unlimited storage capacity, the natural gas price curve would “flatten out” and there would not be the large differences between contract months. The market also would be less attractive to futures traders because it would not provide them with spread trading opportunities.

Spread trading is an attractive place to access the market because it’s less volatile than outright futures and less expensive. The margin requirements for trading them are much lower, allowing traders to leverage themselves even more. On the New York Mercantile Exchange, a margin for a spot-month futures position for a nonexchange member is a minimum of $10,800. However, the margin on a spread position, such as the actively traded November-December spread — the simultaneous purchase of November and sale of December or vice versa — is approximately $1,350, or less than 15% of an outright futures position.

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