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Futures Bide Time, Await Clearer February Weather Picture

After trading lower in the overnight Access session, February natural gas futures opened Tuesday at $8.470, which turned out to be the contract's low on the day as short-covering came in to push the prompt month higher. After hitting a high of $8.940 late in the session, February natural gas ended up settling at $8.682, up 10.8 cents for the day.

With no new solid weather news to consider, the market continued to teeter-totter in a range after crashing back down to earth over the last month and a half. Since the warm weather trend hit in mid-to-late December, February natural gas has plummeted from a high of $15.780 on Dec. 13, 2005 to an intraday low of $8.310 on Jan. 23, marking a $7.470 swing.

"What we are getting right now is a round of short-covering," said Ed Kennedy of Commercial Brokerage Corp. in Miami. "We have had a fantastic move to the downside over a very short time. All that we are seeing right now is shorts taking some money off of the table."

Kennedy said that while forecasts are muddied, the next move could be dictated by what February's weather picture ends up being. "You've got EarthSat and the National Weather Service saying February will display above normal temperatures, but Weather Services is calling for below normal conditions, while AccuWeather.com is calling for well below normal temperatures. So we are looking at a 50-50 scenario right now. The market hates uncertainty, so they are taking some money off of the table. That is all that we are seeing."

Kennedy added that all of the outlooks are currently long-range forecasts, which makes it more difficult to figure out who's right. "Once we get out toward the end of next week, we are going to look over the fence into February and it will be a short-term weather forecast at that point with a lot of credibility to it," he said. "Until then, I think natural gas futures are going to mark time."

One New York floor trader noted that technical traders are having their difficulties in this current market. "A lot of these guys that are trading technically are getting whipsawed," he said. "They end up buying strength -- such as last week when February traded in the $9.40s -- thinking the market was ready to advance. This is not a good market to be trading technically."

More fundamental traders will be closely watching natural gas inventories in the hopes that they don't get whipsawed. In a recent note to clients, Kyle Cooper of Citigroup outlined the wide range of possibilities for season-ending natural gas inventories. He said that the next two reports covering the week ended Jan. 20 and Jan. 27 "should witness a total withdrawal of something close to 200 Bcf. That would leave inventories on Jan. 27 at 2,375 Bcf."

If the highest withdrawals ever experienced are duplicated for each week over the remainder of the withdrawal season that would put season ending inventories just over 1,000 Bcf. Cooper considers that "power ball lottery odds."

At the other extreme, if only 249 Bcf were withdrawn for the remainder of the heating season, inventories would still be over 2,000 Bcf. "The only point is that there is still a rather wide disparity between possible end-of-March inventories," he noted.

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