Natural Gas Trading Hits Record Activity As Volatility Drops

NEW YORK—Trading in natural gas futures surged to record levels this winter, as a dose of tranquility for the once-hyperactive market drew traders.

Easier availability of gas supply, an increased interest in commodities and more-experienced traders helped boost average daily trading volume by 25% last month on the CME Group Inc.-operated New York Mercantile Exchange. Futures contracts on Feb. 10 changed hands 526,280 times, a record high.

Rising production from U.S. gas fields and relatively consistent demand levels during the last two years have created a more predictable supply-and-demand outlook and dug out a clear range for gas prices between $3 and $6 per million British thermal units. In 2010, prices traded between $3.21 and $6.10, the narrowest range since 1999.

On Wednesday, gas for March delivery ended 0.9% higher at $3.90.

The stable prices have drawn money managers, who usually shun risky markets.

"What [money managers] have seen is you have a natural gas market that basically trades within these set parameters, and you can make a serious amount of money within these parameters," said John Woods, an independent gas trader. "We have a very tradable range."

That range in part comes from gas producers' willingness to view increases above $5 as an opportunity to lock in a good selling price, while power generators and other users of the heating fuel have supported the market by buying when prices sank below $4.

Despite this solid range, the market is vulnerable to occasional price spikes, as was seen last year when futures rose almost 25% from May to mid-June in anticipation of high power demand during a record-hot summer. Some high-profile hedge funds that bet prices would remain depressed got burned by the futures' leap.

Weather will always be a variable for natural gas futures, as it was in January and earlier this month as traders scrambled to adjust their positions to a shifting weather outlook. But market participants are becoming more adept at handling the seasonal swings.

"The overall expertise of market participants is always growing," said Bob Levin, CME's managing director of energy research and product development. "Even in a less volatile market, the competition is such that they are able to find opportunities on the hedging and the speculative side."

Gas production companies also face risks from bets that prices will remain in their recent range. Some producers, including Chesapeake Energy Corp. and Devon Energy Corp., have sold large volumes of options contracts, giving buyers the opportunity to purchase gas from the companies for a fixed price. The strategy gives the companies an immediate cash boost but could force them to sell gas for less than the market rate should prices rise above those levels.

Still, natural gas is relatively cheap compared with commodities that went on a tear in 2010. This has led to increased interest in gas trading, as some investors are worried commodities that have hit multi year highs could see steep pullback, said Sean Baker, a Chicago-based market strategist with Vision Financial Markets.

"You look for a middle ground," Mr. Baker said. "People are calling and asking about natural gas. They want to find a reason to buy and sell it."

(Source: http://online.wsj.com/article/SB10001424052748703775704576162703187756400.html)