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Schork Oil Outlook: What Are the Odds?

Open interest in the $10 natural gas strike calls for this winter have ballooned over the last two weeks… from 1,783 to 11,051 in the January 2010 and from 881 to 8,848 in the February 2010. With the respective premiums trading in between $0.05 and $0.06 at the time of this jump, this “trade” amounts to a $9.5 million lottery ticket.

That is one way to look at it. Another way is to say, the trader(s) who wrote those calls just might think this is the easiest $9.5 million they ever pocketed. For instance, if you bought ATM January calls for $0.647 last night the $10 odds are greater than 6-to-1 against you. In other words, if you think there is better than a 16% chance January gas can move from $5.334 to $10 between now and December, then this trade is for you (16% × $4.019 payoff = $0.683 > $0.647 call premium).

Furthermore, if you go back seven years ago, to August 2002, the last time spot NYMEX Henry Hub gas traded below $3, you will see that six months later spot gas tied the previous high, $10.10. Therefore, you might surmise that the odds of a repeat of 2002 are better than 6-to-1. The only problem is, in February 2003 the market was rigged. It was mugged. It was hijacked by some thieving bastard(s). Thus, unless this/these same bastard(s) is/are back buying $10 strike calls with designs on rigging the gas market once again, we doubt the odds of a repeat are as short as 6-to-1.

So what happened back then in late February 2003? Spot gas (Mar’03) was trading in the low $6s on Friday morning, February 21st. Shortly after the NYMEX pits opened a propane barge exploded (within view of the NYMEX) at Port Mobil, Staten Island. This event provided a significant knee-jerk spike in the market, but by the time we went home for the weekend the market was well off its highs.

When we came back in on Monday morning, February 24th, the market was right around unchanged. This was back when the NYMEX overnight electronic session ended at 9:00am and there was a 1 hour lull until the pit session opened at 10:00am. Thus, for that 1 hour the only trading taking place occurred on the ICE. Inside that hour a massive wave of buy orders came into the market. Thus, whereas the Mar’03 was trading right around Friday’s 6.222 settle when the electronic session closed at 9:00am Monday, the pit session opened 1 hour later at 6.800!

What the heck happened? As it turned out, we were in the final week of the Mar’03 contract and therefore the NYMEX lifted its intra-day limits. Some large buyer, most likely a hedge fund (yeah they existed back then, but you didn’t hear about them because they were trading natural gas and not crude oil) recognized this and came in and lifted every offer in sight on the ICE while the NYMEX traders were handcuffed for that one hour.

Therefore, if you had bought the rumor (the propane barge explosion) and then positioned yourself for a little fact selloff, then, when the market reopened Monday morning you were down $5,780 per contract. The market for March gas finished that day at 7.219, spiked to 11.899 (electronic session) on Tuesday and then expired at 8.700 that Wednesday, February 26th, 2003.

However, as you can see in the chart in today’s issue of The Schork Report, gas jumped down as fast as it jumped up in 2003. In this light, you can never say never. January 2010 gas might go to $10, but it might need a little help to do so… wink, wink… nudge, nudge.

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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