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Futures Rally Begins the Week on Colder Temp Forecasts

Natural gas futures staged a rally overnight Sunday and into Monday's regular session as traders assessed forecasts for more seasonal January weather and a short-term positive technical outlook. After reaching a high of $6.560 on Monday, February natural gas ended up closing at $6.378, up 19.4 cents from Friday's close.

One broker noted that the market's oversold condition made the time ripe for a rally, even if supply still far exceeds demand. Jay Levine, a broker with enerjay LLC, said "visions of the season's first official blast of arctic cold temperatures" on the horizon really shouldn't matter much to a market weighed down by too much supply and not enough demand. However, he noted that because the complex is "seriously oversold," a rally -- any rally -- was due.

"My resistance in [February natural gas futures] is actually somewhere between $6.60 and $6.70 (some might key off of this $6.50+ area) followed by $7.00-$7.25, calling it $7.125 for compromise sake," he said. "I'd look for support back in the low $6.30s/high $6.20s followed by another test of $6.00, which could give way, very quickly, to $5.75 or thereabouts."

Turning attention towards the natural gas storage surplus, Citigroup analyst Tim Evans said that with the storage reports for the weeks ended Jan. 5 (40-50 Bcf withdrawal expectation) and Jan. 12 (60-70 Bcf withdrawal expectation) likely to be bearish, the new surge of cold won't probably be felt until the week ended Jan. 19, when the withdrawal could get up around 150 Bcf. He noted that with five-year average withdrawal comparisons for those three weeks coming in at 102 Bcf, 120 Bcf and 159 Bcf, respectively, it may take even more cold to "erode the swelling year-on-five-year average surplus" currently in storage. "We'd be buyers more on the price action than on the weather," Evans added.

Short-run weather patterns are forecast to bring cooler air into Midwest energy markets. AccuWeather said a clipper system sliding through the Midwest was expected to bring more seasonable weather to the region Monday night, which has not been experienced in about a month or so. "Chilly Canadian air along with brisk northwesterly winds will sweep from Dakotas and Minnesota southeastward into the Ohio Valley, and along with the cold air and gusty winds will be some snow showers," said AccuWeather forecaster Brian Frugis. The cold air will stick around for Tuesday, limiting highs in many places to just the low 30s, the forecaster said.

Temperatures may cool off, but even normal readings still remain a stretch. AccuWeather forecasted that Monday's high for New York City of 56 degrees should drop to 44 degrees by Thursday. However, New York's normal high for this time of year is 38 degrees. Chicago, more directly in the path of the cooler air, is forecast to see a high Monday of 38 degrees and that is expected to increase to 40 degrees by Thursday. The normal high in Chicago this time of year is 31 degrees, AccuWeather said.

Longer-term weather forecasts are a little more helpful to the bulls. The National Weather Service in its six- to 10-day forecast Monday covering Jan. 14-18 shows below normal temperatures across a broad swath of the U.S. Colder than normal temperatures are expected west of a diagonal line from the western border of Minnesota down through all of Tennessee and most of Georgia. Florida is expected to experience seasonal temperatures while most of the MidAtlantic and Northeast should continue to see warmer than normal temperatures.

Market technicians see last week's price activity suggesting that the bears will take a brief rest before slashing prices still lower. "The narrow range congestion just above the lows after a sharp drop is typical of a bear market rest stop in a continuing decline," said Walter Zimmerman of United Energy. He added that the longer natural gas prices linger, "the more likely another sharp drop becomes. We suspect that the $9.050 to $5.740 decline was only the initial 'a' wave down of the expected a, b, c correction of the $4.050 to $9.050 rally. And this suggests that any rally this week will be the 'b' wave correction and therefore a scale-up sell opportunity."

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