From the January 01, 2010 issue of Futures Magazine • Subscribe!

Natural gas: Range bound?

As we go to press, Chicago has been hit with the first bout of seriously cold winter weather. This is good news for natural gas bulls as the front month contract is up 45¢ per mmBtu.

The cold snap followed a slightly bullish supply report but the long range fundamentals continue to be extremely bearish, according to Phil Flynn, senior energy analyst for PFGBest Research. “A bullish report on natural gas is a lot more bullish when traders come into work with frost bite on their ears,” jokes Flynn.

“Production of natural gas has never been higher, proven reserves have never been higher,” says Flynn, adding that technological advances in gas drilling allowed for significant increases in production.

While Flynn acknowledges the tendency for gas surpluses to shrivel up as temperatures plummet and prices spike, he says, “I don’t think that will be the case this year. From a supply standpoint, we are in the best position at any time in the last 10 to 15 years.”

Liberty Trading’s James Cordier agrees, noting that the gas supply situation makes selling volatility into weather inspired price spikes a solid play.

A look at the February natural gas chart as opposed to a front month chart may explain why this year could be different. The front month contract is near recent highs whereas the February contract appears near recent lows. The February natural gas contract plummeted in October and November due to warm weather after remaining at a better than $2 premium to the front month when gas hit its lows in September. Flynn explains that this means producers were locking in profitable prices while the front month was dropping below $2.50. Because of their ability to lock in profits, producers didn’t cut production. “The futures market did its job,” Flynn says, and because of that prices should be relatively resilient to a weather shock.

Flynn expects the February contract to stay range bound in January with a high of $6.50 to $7 if we experience very cold weather.

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