Futures Gap Higher as Bulls Target All-Time Highs

Boosted by soaring cash prices and cooler temps both outside traders' windows and in the latest weather forecasts, natural gas futures were higher Monday after gains registered in the Sunday night Access trading session were validated by a gap higher open. The December contract was the largest beneficiary of the Sunday evening-Monday morning buying frenzy, finishing up 24.2 cents at $5.698. Meanwhile the back months lagged considerably, evidenced by the 12-month strip, which only advanced 8.2 cents to $4.826.

While market watchers have pointed to everything from trend lines to weather forecasts to explain the two-week, $1.30-cent rally, one factor has not been overtly in bulls' favor as of late. However that came to an end yesterday when cash prices roared back to life, narrowing the wide chasm that has separated November cash prices and December futures. NGI's Henry Hub index for today is $5.59, just a dime less than December's close Monday. Comparatively, over the first nine trading days of November, the cash-futures spread averaged a whopping 26 cents.

At one point yesterday afternoon, the cash futures spread had shrunk to almost nothing and that prompted commercial traders to bid up futures prices in the last 45 minutes of trading, said Ed Kennedy of Miami-based Pioneer Futures. "Local sellers took December all the way back down to $5.61, late in the session, but trade buyers were there and ran it right back up."

Another factor that Kennedy believes is fueling this market is the latest round of weather forecasts, which range from bullish to more bullish. While the National Weather Service continues to point to below-normal temperatures for the intermediate-term, several of the private forecasters, including Jon Davis of Salomon Smith Barney, look for a blend of below, and much-below normal temperatures. Citing a better track record as of late, Kennedy favors the NWS's outlook, which calls for below-normal readings across the entire U.S. except for the Upper Plains and Washington state.

Looking ahead, there are no obvious selling indicators out there, according to Ira Hochman of New York-based Trot Trading Corp. "If you really want to short this thing, you might sell on a move to $5.82 with a buy stop at the prior high of $5.87 to limit your risk." Other than that, it would take a gap below $5.55 (island reversal) on today's open to convince Hochman the market is coming off.

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