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Short-Covering Boosts Futures in Another Friday Rally

Short-Covering Boosts Futures in Another Friday Rally

Historically, the end of the week has meant slackened gas demand, but for the sixth consecutive Friday natural gas futures were able to tack on gains. Revised weather forecasts for this week and continued concerns over supply shortages gave rise to light short-covering throughout the trading session Friday. The July contract finished up 2.3 cents at $2.308 amid a moderate volume of 64,873.

Contradictory weather forecasts last week had fundamental traders unsure of what to expect in terms of demand this week. While several private short run predictions, which utilize the European forecasting model, call for generally below-normal temperatures this week, the National Weather Service expects above-normal temperatures to be prevalent. The net impact on the market? "People decided to avoid going into the weekend short and reassess their position on Monday," says Ed Kennedy of Miami-based Pioneer Futures.

Despite the market's positive direction Friday, Kennedy feels the market failed on two counts. "First, July settled for the second day in a row below its 40-day moving average. Second, cash prices dipped below first of month index for the first time this month." Daily GPI's first of month Henry Hub index was $2.22. Looking ahead, he feels July needs to clear the $2.35 level in order for the bulls to regain control and that may not be possible without an extended period of sustained demand. "Then we would see exactly how tight the supply situation is," he continued.

A sustained period of above-normal temperatures may not be in the cards quite yet says Fred Gesser of Omaha-based Strategic Weather Services. Gesser looks for the weather to continue to seesaw for the next month as temperatures oscillate above and below normal. His forecast, which is based on the coldest sea surface temperatures in the Eastern Pacific Ocean in 50 years, calls for the Central U.S. to experience normal, above-normal, and much-above normal temperatures while the East Coast will see normal and below-normal readings.

Citing those cooler temperatures expected in the East, Susannah Hardesty, of Indiana-based Energy Research & Trading, believes that the market has seen the last of its spring highs. Hardesty predicts prices will continue lower into the expiration of the July contract before etching the first of its summer lows between July 5 and 23 on a move by the August contract to the $1.80 and $2.00 level.

What about the undeniably bullish storage report that failed to move the market higher? Hardesty feels it proves the market is more concerned with the lack of potential demand rather than the lack of potential supply. "Storage owners are betting they will be able to make up the difference later," she said.

However, Cynthia Kase, of New Mexico-based Kase and Company views the move lower as just a correction amid the larger bullish trend. "If the funds hit the market as sellers, the correction could run as deep as $2.155. But once that move is complete, I expect a renewed push back up to the $2.50 area or better," Kase said.

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