Buoyed by Weather and Storage, Bulls Battle Back Friday

Fueled by another round of bullish weather forecasts and following on the heels of gains achieved in Thursday night's Access trading session, natural gas spiraled higher Friday, as traders took back ground lost earlier in the week. When the dust had cleared and the orders were counted in the data room at Nymex, the January contract was 98.3 cents higher on the day, but still off 18.8 cents for the week.

In an updated six- to 10-day forecast released Friday, the National Weather Service was looking for below normal temperatures to invade almost the entire lower 48 states for the Dec. 21-26 period. Only North Dakota and Montana, where it will be cold nonetheless, were expected to see normal mercury readings.

Also of influence, traders agreed, was the release late Thursday of long-term 30- and 90-day forecasts by the NWS's Climate Prediction Center. According to the CPC, below normal temperatures are expected over densely populated areas from Pennsylvania and New York State across the Upper Midwest and Great Lakes regions including Minnesota.

However, waiting for the latest weather forecast was not the only game in town last week. Although more latent in its impact than the temperature predictions, the weekly storage figure was an undeniably bullish factor as well. According to the American Gas Association, 158 Bcf was pulled from underground storage facilities during the week ending Dec. 8, bringing working totals to 2,271 Bcf, or 69% full. Although the withdrawal fell neatly within the 140-170 Bcf range of market expectations, it more than doubled the 73 Bcf withdrawal seen both the previous week and last year at this time.

For Tim Evans of New York-based IFR Pegasus the truly bullish news is yet to come. "With below normal temperature [last] week, we see this [588 Bcf year-on-year] shortfall expanding in [this] week's data by perhaps another 40-50 Bcf. From that point, even if the weather is warmer than in the same week a year ago, we think it will prove a major accomplishment just to get the deficit back down to the current level. Last spring we bottomed at 1,008 Bcf, implying that a match of last year's storage pattern going forward would leave us with just 420 Bcf on hand at the end of the winter. We hardly consider that a bearish factor," he wrote in his daily Pegasus NatGas Report last Wednesday.

If prices are able to move higher this week on bullish fundamentals, the market will need to punch through several levels of overhead resistance. The first objective will be Friday's $8.55 high. Once above that area, the market will look to retest the bottom of last week's island reversal at $9.00.

However, a move toward $9.00 would represent a selling opportunity, says Gerald Rafferty of New York-based Rafferty Energy Group. "There was some real damage done to the uptrend when the market gapped below $9.00 Tuesday to form an island reversal pattern. We had no problem retesting the $7.20 level. I would say that we now stand a good chance of entering a sideways consolidation period between $7.20 and $9.00. Because of that, I would look to sell rallies toward the $9.00 level and buy the market on weakness down to $7.20."

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