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Futures Continue Higher, But Traders Question Longevity of Run

Maintaining the momentum from the final two days of trading last week, natural gas futures on Monday -- aided by strength in equities and petroleum futures -- continued higher despite the lack of direct bullish fundamentals. The April contract climbed 6.7 cents to close at $4.294.

Crude futures continued their gaining ways on Monday. The May crude contract added $1.73 on the day to close at $53.80/bbl, which loaned support to natural gas futures. April natural gas climbed as high as $4.350 in morning trade before backing off a bit in the afternoon.

"I'm not surprised that natural gas futures are holding on to the gains of last week," said Ed Kennedy, a broker with Hencorp Becstone Futures LC in Miami. "It is pretty clear there is a huge short interest out there, so something has to give. Sure we have a lot of gas in storage, but that is a nonfactor at this point. According to my calendar it is late March, so now we have to move ahead and focus on demand this spring and summer."

Kennedy said he thinks the price run-up currently being seen is some of the shorts exiting their positions to take advantage of cheap storage gas for winter 2009-2010. "The amount of gas left in storage is meaningless right now, but the price of storage gas is by no means meaningless," he said. "The average cost of gas in storage for this year was $10. Right now, you can lock in around $4.600. If you are going to be injecting gas this year, you can't go wrong with $4.600 gas. You don't know how hot the summer is going to be and you don't know how many or where the hurricanes are headed, so you'd be foolish not to lock in the price at these levels. I think this is what the market is reacting to. When you are short and have no chance of getting the market any lower because there is good scaled-down buying all of the way out to September, what do you do to take a profit? You buy."

Despite the recent bullish rebound, Kennedy warned traders not to get carried away. "Once you get up into the mid-$4 range, selling will likely come back in. You have to remember this move is not based on a strong bullish case; rather it was caused in part by very limited expectations to the exhausted downside."

Other top traders are also wary about a sustained advance. "There has been a reluctance by end-users to lock in the summer strip, regardless of the price, because everyone has been so negative on the U.S. economy," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

It is DeVooght's contention that when prices jumped higher following Thursday's release of modestly supportive inventory data, "everyone wanted in at the same moment, which created a monstrous spike in a very short time period. On a trading basis, it has been our feeling that the gas market was searching for a bottom and we were starting to probe from the long side." DeVooght doesn't look for any rapid advance. "We do not feel it will be up, up and away; the bottom process will take time. At this time, we are trading, not investing, in the gas market."

The near-term weather outlook shows below-normal temperatures across a broad section of the Plains, but the pivotal Midwest and eastern energy markets are normal. MDA EarthSat in its six- to 10-day forecast said, "The period starts out on a chilly note across the Midcontinent, with much-below-[normal temperatures] making a quick appearance even as far south as Texas. To the east of the storm helping bring this cooler air southward, warmer weather is found across the East," said meteorologist Matt Rogers.

Rogers added that there is some concern that high pressure across Eastern Canada and the Northeast could help slow the arrival of the warmer weather. In the West, the warming discussed late last week has had trouble moving forward, and the forecast has cooled there. "Most of the warm weather in the West is currently limited to California and the desert Southwest," he said.

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