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Extended Temperature 'Dark Blues' Spur Futures Well Above $7

February natural gas futures hit the ground running Monday following a weekend forecast for some extended cold throughout the eastern half of the United States. After gapping higher to open Monday's trading well above psychological resistance at $7, the prompt month put in a high of $7.340 before settling at $7.319, up 43.3 cents from Friday's close.

"Nothing like some cold weather to bring back the large price swings in the natural gas futures market that we know and love," said a Washington, DC-based broker. "The move Monday was completely attributable to the National Weather Service's cold weather forecasts made on Sunday. It's all about the dark blues," she said, referring to the significant increase in forecasted much-below-normal temperature regions.

Over the weekend, the National Weather Service (NWS) predicted in its six-to 10-day forecast an expansive area of below normal temperatures. South and east of a line from eastern Minnesota all the way to southeastern Arizona was forecast to be below normal. Late Monday afternoon, that forecast got even colder. From Jan. 28 to Feb. 1, the NWS expects blue to take over almost entirely. For those dates, the NWS said it expects the entire country to experience below normal temperatures with the exceptions of parts of New Mexico, Arizona, Nevada, Washington, Montana and North Dakota, which are expected to experience seasonal temps. All of California is expected to be seasonal as well with the exception of the very southwestern tip, which could see above-normal readings.

As for Monday's strong close, the broker said it definitely left open the door to higher prices."The fact that we were able to settle decisively above $7 likely means to a lot of people that we can continue this rally," she said. "Our technical systems have been long for a little bit here and things are finally coming together. Technically speaking, there is not a lot between us and $8 here. It was definitely a good day for the bulls. As long as the weather forecasts hold, I think we will find support pretty easily.

"The other interesting thing is that the February and March contracts are almost the same price. Even with the roll, we are not going to gain all of this ground. Just a few months ago, the next month was that much more expensive, so when we rolled, we would fall apart. That is not going to be an issue here." The March contract closed at $7.311, less than a penny lower than February's close.

Despite the solid gain Monday, there was one blip in the bullish move. Following the $7.340 high recorded at 11:30 a.m. EST, February natural gas dropped to a low of $6.930 by 1:30 p.m., only to rally back a few minutes later.

"We talked to the floor in the afternoon right after that large sell-off and word was that a 200-lot order came into the floor, backing prices off significantly for a short time," the broker explained. "While electronic trading may be the darling right now, floor trading certainly is not dead."

Looking ahead to Thursday's storage report for the week ended Jan. 19, the industry is expecting a significant draw due to the cold last week, which would be a change of course from the recently moderate storage pulls. "While there is still a lot of gas in storage, you have to remember it is all a game of expectations," the broker said. "When you have been used to having very tiny draws, a sizeable pull will seem quite dramatic. Whether it should be seen as that dramatic of an action is something that is open to debate. Much like the first hurricane or the first freeze of the year, the first really good withdrawal is always worth a little something."

Despite the near-term cold, the NWS is still not flinching from its El Nino-driven forecast of above-normal temperatures into the late winter and early spring. Last Thursday the NWS released its long-term forecast and for the months of February, March and April predicted above normal temperatures running north of a line extending along the Virginia-Maryland border to the Kansas-Oklahoma border to San Francisco. South of that line is expected to experience normal temperatures.

Others see upcoming weather far differently. Joe Bastardi of AccuWeather said "the GFS [Global Forecasting System] is now going to lose its mind." He pointed out that the El Nino is collapsing, and a "slow migration south of what is first a lake, then a deep ocean of severely cold air with the blocking pushing the vortex south...is something that we should take very seriously. But what you see later is far more widespread and severe for the nation and is of the genre of outbreak we saw in late Dec 1983 or Jan 1985." Bastardi calls it a "sea of cold that simply overwhelms" and notes that the computer models try to feed all that cold all the way back to the Rockies.

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