Happy (Short Squeeze) Holidays:
DJ Nymex Gas Sees Huge Rally On Surprise EIA Storage Data
NEW YORK (Dow Jones)--Natural gas futures registered a mammoth gain
Wednesday, one of the largest single day rallies in the history of the market,
as a surprisingly large draw reported in the Energy Information
Administration's weekly storage survey shocked traders.
The market's first reaction was to send prices up as much as 8%, but those
gains initially began to fade as surprise turned to skepticism. The gains
escalated to as much as 22% off the session low in the last half hour of the
session as traders rushed to stem losses and roll over December futures.
"Definitely there's a short squeeze going on," said Andy Weissman, chairman
of investment firm Energy Ventures Group.
The chaos was enhanced by the rare coincidence of futures expiration and the
EIA report as well as an upcoming four day break for the Thanksgiving holiday.
"Whoever was holding December contracts ahead of noon was not anticipating
this," said Weissman. "When you get this kind of price movement, anyone who's
short is very much subject to getting margin calls."
December natural gas futures settled and expired $1.18 higher at $7.976 per
million British thermal units. January futures also gained more than a dollar
to settle at $8.639/MMBtu, possibly due to heavy short-interest in the contract
on a recent trading recommendation by a major investment bank.
"It's purely based on the EIA number which was a big surprise," said Haydeh
Davoudi, a gas futures trader at Dow Inc.
A Dow Jones Newswires survey had a consensus of an 11 billion cubic feet draw
with the median forecast being 12.5 Bcf and the highest expected draw being 23
Bcf. Indeed, the implied probability distribution of an auction of options on
the survey by ICAP Energy and Nymex gave a 0% chance of a draw above 35 Bcf and
only a 1.8% chance of one above 25 Bcf.
Analysts and traders were struggling to explain the large draw during a week
when official weather data suggested even milder temperatures than the week
earlier, which saw just a 6 Bcf draw.
"It's so far off the charts - it doesn't make sense," said a Texas-based
trader. "There's no reason there should have been that much demand in the
East."
Analysts couldn't offer fundamental explanations for the surge in
withdrawals.
"Significantly, more than 90% of the withdrawals from storage occurred in the
eastern consuming region, even though there were 15-25% fewer heating degree
days last week than the previous week," wrote Dan Lippe, president of Petral
Consulting.
One explanation put forward by Lippe and others in the market is that the EIA
somehow collected faulty data and, due to the early release date or a thin
staff ahead of the holiday, wasn't able to correct it.
"I'm now absolutely 100% certain there's an error," said Weissman. "It's
inconceivable the weather that existed last week could have produced this
draw."
If true, the error was a costly one for many traders, producing tens of
millions of dollars in losses on the day for traders short the market on what
seemed to be overwhelmingly bearish fundamentals.
Physical prices also surged on the day, though this preceded the EIA release
and had to do with convergence on expiration of the December contract. Deals on
the benchmark Henry Hub went from as low as $4.47/MMBtu to a high of
$6.08/MMBtu, still nearly $2.00/MMBtu below where December expired and about
$2.60 below the new January front month contract.
-By Spencer Jakab, Dow Jones Newswires; 201-938-4377;
spencer.jakab@dowjones.com
(END) Dow Jones Newswires
11-24-04 1719ET |
