After a bumpy ride early last week marked by double-digit price swings, natural gas futures coasted smoothly into the weekend Thursday and Friday as traders elected to wait until a clearer fundamental and technical picture is available. By failing to break out of Thursday’s 15-cent trading range, the December contract notched a second-straight “inside day” on the daily chart. It finished at $3.248, down 4.2 cents for the session Friday, but up 6.5 cents for the week.

Most traders surveyed by NGI Friday expected the futures market to follow the cash market lower into the weekend. A combination of mild weather expected over the weekend and plentiful supply as a result of a heavy volume of baseload purchases kept cash prices at a hefty discount to the futures screen, they agreed. Henry Hub cash prices for the weekend sifted 5 cents lower to close at $2.96, about 30 cents below December futures. Meanwhile, January futures remained at a premium to December, slipping 4.2 cents to close out the week at $3.392. A possible explanation to the hefty premiums for December and January gas, a trader hypothesised, is the market’s expectation that this winter will bring much colder-than-expected temperatures.

In his weekly update to the energy markets last Thursday, meteorologist Jon Davis confirmed his earlier winter forecast (see Daily GPI, Oct. 17), calling for below-normal temperatures to invade sections of the eastern and midwestern U.S. this month. “There are some very strong indication that as we head toward the middle of the month, there are going to be significant changes in the jet stream pattern across North America,” he wrote in his report released Nov. 1. “Typically, this pattern produces troughing in the central and eastern U.S. while a ridge of high pressure forms over the western U.S. This will tend to produce a bias of warmth in the western U.S. and colder weather in the central and eastern U.S.”

However, not all traders are hanging their hats on another cold winter for the East. “The winter strip is certainly setting itself up for a cold winter,” a risk manager said. “Cash prices fall each weekend amid mild weather and weak industrial demand and the winter months stay strong, at least for now. It will be interesting to see if the futures market can resist a downturn if the forecasts do not play out as some hope.”

Although winter weather ultimately will dictate the market’s price direction, technical factors should not be ignored. The weekly Commitments of Traders report released Friday by the Commodity Futures Trading Commission surprised the market with data showing that the non-commercial segment of the market is still net short more than 14,000 positions, down only slightly from the week prior. Historically, non-commercial traders accumulate long positions when the prompt month is above its 40-day moving average, and short the market when it is below its 40-day. However, that has not been the case this time around, as non-commercials hold basically the same level of net short positions they did when the December contract surpassed its 40-day average more than two weeks ago.

For Tim Evans of New York-based IFR Pegasus, that is a tell-tale sign fund managers are determined to ride out the intermediate-term rally, waiting for an opportunity to sell into a move lower. Because non-commercials have shown the ability to extend their short holdings to a net 35,000 position, Evans believes this means an additional “20,000 contracts of fresh fund selling once the market rolls over.”

Tom Saal of Pioneer Futures in Miami agrees, adding that the commercial segment of the market — through its liquidation of more than 65,000 long positions — has sent the message it is skeptical of further advances.

©Copyright 2001 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.