Futures Finish Strongly After Midweek Plunge

After tumbling to a new two-week low Tuesday, natural gas futures roared back to life Thursday and Friday as traders were foreced to cover their newly acquired short positions. With that the February contract was able to take back a dollar of last Tuesday's record-breaking $1.411 sell-off, finishing the week at $9.261.

Traders were surprised when they arrived back in the office last Tuesday to learn that bears had been at work in the overnight Access trading session. That selling pressure coupled with weather forecasts pointing to a considerable warm-up this week were enough to produce a massive sell-off throughout the day Tuesday. When all was said and done, the February contract was $1.411 lower at $8.364, the largest single-day price erosion in the commodity's history.

Follow-through selling was the name of the game Wednesday as traders awaited fresh storage data. However, not even a modestly bullish storage report could stem the price slide, as February tumbled to close at $8.189.

According to the American Gas Association, 209 Bcf was pulled from the ground during the week ending Dec. 29, leaving storage facilities with 1,729 Bcf, or just 53% full. Although that draw was well within the range of market expectations, it far outpaced historical comparisons with last year (133 Bcf) and the 5-year average (135 Bcf). Last week's withdrawal was also conspicuous because it represented the first time in the seven-year history of AGA data that storage has decreased by more than 200 Bcf during a week in the month of December.

However, just when it looked as if bears would take the February contract below key levels of support in the lower $8.00 area, bulls won back control at Nymex Thursday morning as fresh private forecasts cast doubt on governmental forecasts issued earlier in the week.

According to Jon Davis of Salomon Smith Barney, a more zonal jet stream over the next few weeks will supplant the high amplitude jet stream prevalent for the past four to five weeks, allowing temperatures to moderate in the central and eastern U.S. And while a similar set up last winter produced temperatures 10, 15 and 20 degrees above normal, that will not be the case this year, he continued. "The reason for this lies in the snow cover variable across the US. To put it in political terms that everyone can understand, it's the snow, stupid!" By Friday more of the same was on the way as snow was falling on population centers of the East Coast from Washington northward. Prices meanwhile were rising again amid technical buying and follow-through short covering.

Looking ahead, Jerry Rafferty of New York-based GPR, Inc. believes the current price level offers a relatively low risk selling opportunity. Specifically, he points to resistance levels at $9.25, $9.45 and $9.65 that represent several different entry points to short this market for a potential move back down to the $8.00 level. The crux of his recommendation stems from the market's inability to hold support through that same $9.25-65 area on the move lower last Tuesday. "When really good bull markets break support levels and then get washed lower, those [support] levels become excellent selling opportunities when the market returns to the scene of the crime." If wrong, and prices push through $9.65, he would exit the short with a $9.70 buy stop for a small loss.

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