Breaching the upper limits of its recent trading range, December natural gas futures recorded a new high of $8.380 Tuesday afternoon before going off of the board at $8.318, up 32 cents. The Canadian cold air mass over the Midwest and West that is expected to make its way into the East by late in the week also kept other contracts strong. The January natural gas futures contract climbed 20.2 cents on the day to close at $8.559.
The $8.380 high broke the December contract's recent stand-off with the $8.250 level, although traders were quick to note that anything goes on expiration day. "I was a little surprised with the rally because I did expect a little bit of a sell-off on expiration," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "However, I kind of felt we would be moving higher down the road anyway. The market is reacting to winter, especially with the cold snap expected late in the week through the East."
As for who was active Tuesday, Saal said it appeared commercial hedgers were "buying back their short positions," because "they were still short" according to the latest Commodity Futures Trading Commission Commitment of Traders report.
Looking ahead, Saal noted that the futures market is "pretty strong" currently. "With the expectations of some real cold coming in, we'll see what this market is made of," he said. "If you thought we had seen some high volatility recently, you haven't seen anything yet. It all has to do with whether or not weather shows up. It could be buy the rumor and sell the fact, so we will see what the rest of the week brings."
Ahead of trading Tuesday, others expected weakness to dominate expiration as well. "We feel that the odds currently favor a weak expiration given a likely need to close the gap against lower-priced physical values," said Jim Ritterbusch of Ritterbusch and Associates, said Tuesday morning. He contended that the low physical market prices are "unlikely to post appreciable strength [Tuesday] given continued mild temperature patterns across much of the Midcontinent region. Consequently, demand for December futures from the commercial segment could prove limited."
He offered the caveat, however, that the December contract has recently been quite solid and has managed to gravitate around the $8.00 mark in the face of seemingly bearish storage and weather factors. "The ability to hold above [Monday's] settlement [on Tuesday] would suggest a price floor at about the $8.00 level for the January contract during the coming month."
Mild temperatures in the Midcontinent have some forecasters scratching their heads. Chicago Meteorologist Tom Skilling points out that "the 60s predicted Tuesday and Wednesday would produce the longest late season string of 60s ever observed at the South Side (Midway Airport) site. Records there extend back 78 years to 1928. Until now, a string of five 60s in late November 1998 has been the longest at Midway." He noted that 60 degree temperatures are a rare commodity at this time of year. "Only 3% of the city's high temperatures in the final week of November and first week of December have reached or exceeded 60 degrees."
The Midwest, however, is in for some big weather changes, The Weather Channel pointed out. Rain is expected to spread north and eastward from Kansas to Michigan with periods of heavy rain around Kansas City, and "the area of rain will slowly spread eastward over the next few days into the Great Lakes region and Ohio Valley ahead of colder air," the forecaster said.
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