Weather Reports Spur Futures to Record Gains

Boosted by what may be the most bullish weather forecast to hit the industry in years, natural gas futures spiked dramatically in multiple buying surges Sunday night and Monday morning as traders pressed the envelope of their long exposures.

After waiting impatiently while trading was halted by Nymex for an hour yesterday between 10:27 and 11:27 A.M. (ET), traders were once again on the offensive late Monday morning as they pressured prices to a new $7.95 high. Light profit taking was seen yesterday afternoon, trimming gains to deliver the January contract to $7.433, up a cool 76 cents on the day.

According to esteemed industry weather forecasters Jon B. Davis and Mark Russo of Salomon Smith Barney, the myriad of computer models Monday morning were pointing to a massive Arctic air mass surging from the Polar regions down into the U.S. next week. "This air mass is extremely impressive and is expected to be in the range of about 1050 millibars (the standard unit of measurement for atmospheric pressure) when it moves into the Northern Rockies.... Keep in mind that we have not had an Arctic air mass this strong move into the lower 48 during the past four winters," they wrote in SSB's daily Energy Weather report aimed at heating oil and natural gas markets (see Daily GPI, Dec. 5).

As recently as Sunday evening, the National Weather Service was calling for below normal temperatures next week for a large chunk of the northern half of the country from Vermont extending on a wave-shaped line drawn south to Texas and then back up to the Pacific Northwest. South of this line, normal temperatures are expected for the Dec. 9-13 period. North of the line, below-normal temperatures are forecast.

Looking ahead, Nymex local Ira Hochman believes that those traders with strong intestinal fortitude should continue to play the long side and look to buy January below yesterday's midpoint at $7.575. While he admits there is no exact science for knowing when to exit those longs entirely, Hochman notes that there was a selling tail yesterday in the $7.80-95 area. A selling tail, he explained, is an area of resistance formed when a market makes a high on the day, but does not trade in that area for very long. Monday, for example, the market spent less than 30 minutes above $7.80. Another potential sell signal is the way in which commercial and locals alike have treated the March-April spread. Hochman has observed heavy interest in buying March and selling April, which has caused the March-April spread to widen considerably on the move higher. He believes traders are betting heavily that cold weather and possible storage woes in February will spur March futures dramatically higher. When you start to see that spread (March-April) compressing again, it will be a sign that traders have given up on winter. Until that time, don't short this market, he warned.

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