Market Commentary

Weekly Recap

March 3, 2014

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From 2/11/14 through 2/19/14 (just six trading days!), the prompt month natural gas contract gained $1.57 per MMBtu or 34%. Last week, in a 24 hour span from 9:00 AM Monday to 9 AM Tuesday, the prompt month shed more than $1.00 per MMBtu. By weeks end, the prompt month was trading around $4.55-$4.60, the exact price point it finished at on 2/10/14. In the midst of the sell-off, the March 2014 contract finished its term as the prompt month by expiring at $4.855. With the exception of February’s $5.557 finish, it was the highest monthly expiration price since February 2010.

The past 13 trading days have been a whirlwind for natural gas and a reminder to financial analysts worldwide that natural gas remains the most volatile commodity. Obviously cold temperatures and plummeting storage inventories are largely responsible for the recent bullishness in natural gas, which has spilled over into power prices as well, since they are so closely linked to natural gas. This winter does not seem to be letting up, as another winter storm is currently barreling across the eastern United States. As the graph to the right illustrates, we are more than 900 BCF below last year and 700 BCF below the 5 year average. At this point, the only real question is whether or not we will finish the withdrawal season below 1 TCF, a level last breached in 2003 when the supply/demand balance in natural gas was vastly different from what it is today.

However, weather and storage inventories simply do not explain the entirety of the bullish move and do not justify the reversal in prices back towards $4.55-$4.60. Rather, the highly active involvement of hedge funds and speculative traders in the commodities market is partially to blame for the exasperated volatility. With many traders speculating on the March and April contracts, some were forced to sell their March positions ahead of expiration (they do not want to take physical delivery of the commodity) and got “squeezed”. Others were able to drive the price abruptly lower, as those original buyers were forced to become sellers with a hard deadline.