March natural gas futures squeezed out a 2.8-cent gain Friday to close at $7.755 as traders prepared for the contract's expiration Monday while trying to decipher what impact the weather picture for March will bring. Friday's close was 25.2 cents higher than the previous week's finish.
"We are going horizontal here within a big range, but once we break out either way it could be a big move," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "The market is stabilizing and the weather is moderating in the short term. Even with the moderating weather, we are stabilizing at a higher level than before the cold weather due to the run on storage over the last couple of weeks. We will have to see what March brings in the way of weather."
Saal noted that increased volatility late in the session was probably attributable to a late run on positions. "Looking at Friday's session, there was a lot of volatility in the last half hour that I attribute to people trying to take long and short positions," he said. "Somebody blinked and then the other guy was able to take advantage of them. It was a pretty big move."
Rafferty Technical Research's Steve Blair said he sees a follow-the-leader relationship with crude. "If you look at the market over the last two or three days, it has been taking its lead from crude futures. Every time crude rallies, natural gas rallies and every time crude drops, so does natural gas," the broker said. "When natural gas got down to its $7.580 low Friday, crude was getting hammered. I think natural gas saw some long liquidation and was following crude. When March made new lows for the day late in the session, it rebounded back above $7.600, which got the shorts panicked, pushing it even higher."
Blair noted that the expiration of March options was not much of a factor Friday. "There were really no option strikes that the market was going after here in terms of any big open interest," he said. "There was some open interest at the $7.500 strike -- both calls and puts -- which may have been due to the push lower late in the day. It may have been some attempt at going after that strike, but the market couldn't get it done. I really think this thing is still range-bound with a slight impetus higher."
On Thursday the Energy Information Administration reported a withdrawal from inventory of 223 Bcf, placing supplies at 1,865 Bcf for the remaining six weeks of the heating season. The market greeted the 10:30 a.m EST release with a big ho-hum and moved little. The problem was the number was right on target with industry expectations. A Reuters survey suggested a withdrawal of 224 Bcf, Bloomberg 225, and the ICAP auction 229.
Bulls and bears will now be turning to weather reports to glean insight into the market's next direction. "I don't look for prices to do much until there is a change in the weather," said a New York floor trader. He added that forecasts are calling for near-term warmth followed by cooler temperatures, "but by then it will be March and it will have to get really cold to have an effect on the market," he said.
MDA EarthSat showed in its Friday morning six- to 10-day forecast a cooling that "shifts to the Midcontinent again" and in the 11- to 15-day period the "threat of a bigger cold outbreak lowers." The company admits though, that American and European ensemble (weather models) are reluctant to "dislodge the core of the colder air in western to northwestern Canada this (11- to 15-day) period."
Last year's market experience is not encouraging to market bears expecting a significant drop in prices. At this time last year inventories stood at a more robust 2,161 Bcf, and spot futures were able to reach a late-winter low of just $6.450 on March 8, 2006. Futures did eventually reach a low of $4.050 on Sept. 27, but it required an uneventful hurricane season to pull it off.
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