Profit Taking Stems Futures Rally; Weather Outlook Bullish

Amid easing tensions in the Middle East and a price pullback in the nearby crude oil trading pit, natural gas futures were softer Friday, as traders elected to take profits following last week's almost 80-cent rally. The November contract finished at $5.537, down 9.3 cents on the day, and 24.3 cents off Thursday's price peak.

Traders were almost unanimously in agreement that in order for prices to have continued higher Friday, the situation in the Middle East would have to have gotten worse. That did not happen and prices in both crude and natural gas slipped ahead of the weekend. Crude finished just over a dollar lower on the day at $34.99.

For Tom Saal of Miami-based Pioneer Futures, the writing was on the wall for prices to sift lower Friday following a non-trend day Thursday. "Despite the 12.2-cent gain, the market made its daily high and low within the first 30 minutes of trading [Thursday], reflecting a balance of buying and selling throughout the rest of the day... Look for movement [Friday] away from the balance and toward negative development," wrote Saal in his daily Natural Gas Trader's Outlook Friday. Negative development is the term for a price area which the market moves through, but does not trade very heavily within. Through looking at the Market Profile Trading System developed by Pete Steidlmayer, Saal identifies $5.25-50 as an area of negative development and thus believes the market will likely gravitate there when trading resumes this week.

Another reason why Saal predicts the market will continue lower this week is because of traders' unwillingness to hold or continue above new highs that were achieved last week. "The move higher was driven by the funds. What we failed to see was much in the way of commercial buying to sustain the rally," he continued.

And Saal is not alone in his view. Also chiming in on the side of the bear is Tim Evans of New York-based IFR Pegasus. "A break below $5.59 should confirm that short-term profit taking is under way, knocking November futures back toward the $5.45-57 area where we see potential light support. However, we note that the market spent very little time consolidating during its sharp advance and there is risk of further erosion with failed resistance at $5.38 and then a retest of the market's breakout from the $5.28-30 area as an alternate target."

However, with storage supplies several hundred Bcf behind historical levels, weather becomes even more of a factor this year and many believe it holds the ultimate key to the price direction this winter. To go along with that, there has been plenty of talk over the past couple of months over exactly what Old Man Winter would bring. That talk received some added credibility last week when private and public forecasters announced their official winter outlook.

According to reports released last Thursday by both the National Oceanic and Atmospheric Administration (NOAA) and Salomon Smith Barney (SSB), this winter is expected to return to normal following three straight winters of above normal temperatures. The warmest of the three was last winter, when degree days heating accumulations totaled 4,062 or 10% below normal. Comparatively, the heating demand difference between 1998-2000 and the cold winters in the late 1970s was 20%, according to SSB (see full story this issue). For a visual representation of NOAA's forecast, please visit: http://www.noaanews.noaa.gov/stories/images/enso.jpg

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