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Futures Head-Fake Higher Before Settling 27.1 Cents Lower on the Day

As a blustery cold front continues to consume the eastern half of the U.S., natural gas futures on Monday appeared to be picking up where they left off on Friday -- looking towards higher price levels. However, after January natural gas futures reached a high of $14.450 just before 1:20 p.m. EST, the prompt month dropped off, recording a low of $13.500 before settling at $13.660, down 27.1 cents on the day.

Industry watchers were interested to see whether last week's upward momentum would continue this week. Last week from Tuesday to Friday, January futures soared $2.297 as a cold front swept through the Midwest and East.

In early trading on Monday, cold temperatures and concerns about natural gas supply reliability continued to fuel the bullish case, despite comfortable storage levels, the West remaining warm and the forecast that temperatures in the East might moderate later this week.

"The run-up last week was fueled by some of the funds getting stopped out on some of their short positions, the big question is whether they come back in and try to short this thing back down and make some of that money back," said a Washington, DC-based broker. "We probably could have held the current uptrend if we had held around $13.90, which we did see a bounce off of in afternoon trade. However, when that level failed again, everyone threw in their cards and said 'sell them if you've got them.'"

While the cold front in the East was evident Monday as wintry storms blew through some major natural gas demand markets, the broker said the colder temperatures look like they might be taking a break shortly. "I don't think we are going to get much in follow-up weather behind this storm," he said. "It is my understanding that we are going to get back into the 40s relatively quickly after it. I think in the coming days we will likely give back a pretty good chunk of the price run-up we saw last week. Certainly down into the $12 area, but I am not sure if we will get back into the basing area in the low $12 range."

IFR Energy Services analyst Tim Evans said the natural gas futures price level is still well above where current fundamentals would imply it should be. "Heating degree day accumulations for last week came in higher than forecast, so we're upping our estimate for Thursday's DOE storage report to a 60-70 Bcf net withdrawal, still a touch on the south side of the 74 Bcf five-year average pull," Evans said. "Particularly for the natural gas market, we see the uptrend in price and all of the focus on the cold temperatures in the eastern half of the country as building in a bullish expectation that may be hard to live up to, given that warmer than normal readings in the west will provide a partial offset. Besides, the full justification for the spike beyond $10 was in anticipation of physical shortage this winter, something that's still a long way from being confirmed."

Traders who thought the incursion of cold air might be limited to northern locales might want to think again. AccuWeather.com reported the cold air will remain entrenched across the southern Plains and all the way to the Gulf Coast Monday. "Frost is likely Monday night and early Tuesday just inland from the Gulf of Mexico as the temperature falls to near 32 degrees," the forecaster noted. Freezing temperatures in gas producing sections of Louisiana, and Texas raises the disturbing possibility of gas well freeze-offs and impaired production, traders added.

The Mid-Atlantic and Midwest would feel fortunate if all they had to endure was frost. The National Weather Service forecasts above average tallies of heating degree days (HDD) from New Jersey as far west as Wisconsin. The Mid-Atlantic states of New Jersey, New York and Pennsylvania are forecast to receive 257 HDD, or 50 more than normal for the week ended Dec. 10. Ohio, Indiana, Michigan, Illinois and Wisconsin are expected to endure a bone-chilling 308 HDD, or 72 more than normal.

The Commodity Futures Trading Commission (CFTC) reported Friday that the noncommercial traders held a large net short (futures only) position of 50,181 contracts through Tuesday of last week. On Wednesday, the January contract began the first of a series of huge advances and the January contract advanced a meteoric 85.1 cents to settle at $12.587. That wasn't the end. On Thursday and Friday the January contract soared 44 cents and 90.4 cents respectively to end the week at $13.931. That being said, traders are anxious for the next CFTC Commitments of Traders report, which is likely to show a contraction of the large net short position.

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