After being stuck within an $11.030 to $12.070 range for 11 consecutive regular sessions, December natural gas broke to the upside Wednesday as a cold front reached the East and petroleum futures prices recorded significant gains. December natural gas ended up settling at $12.329, up 76.6 cents from Tuesday's close.
Following the overnight Nymex Access trading session, the prompt month gapped higher Wednesday to open at $11.820, or 25.7 cents higher than Tuesday's finish. From there, traders pushed the contract steadily higher. It reached a high of $12.420 late in the session before slipping a little to settle.
"Trading on Wednesday wasn't really that wild, it was a pretty steady move up by the prompt month on cold weather," said Brad Florer, a broker with ICAP Energy. "Despite the fact that storage is full, I still think there is tremendous concern whether or not production will be able to handle a below-normal-temperature winter. Until there is more confidence in production, it's going to be tough to get any downside follow through. I've said all along, it just feels like there is another spike left in this market. There is definitely still some upside fear out there and that usually has to exhaust itself."
Backing up the production fears has been the drastic slowing over the past couple of days in restoration of Gulf of Mexico production shut-ins. The Minerals Management Service reported Wednesday that 3,713.37 MMcf/d remained shut in, which is basically flat with Tuesday's report of 3,714.72 MMcf/d. Since Aug. 26, cumulative shut-ins from Hurricanes Katrina, Rita and Wilma total 449.474 Bcf, which is equivalent to 12.314% of normal yearly production of gas in the Gulf (3.65 Tcf).
Petroleum futures also put in a strong day Wednesday, with December crude closing 90 cents higher at $57.88/bbl. December unleaded gasoline and December heating oil increased by 2.66 cents and 4.83 cents, respectively, to settle at $1.4830/gallon and $1.7292/gallon.
Temperatures were also beginning to look a little more in line with the seasonal norm Wednesday. Accuweather.com said Wednesday that a cold front has advanced to the Eastern Seaboard. "Ahead of it, temperatures reached the 70s, while behind it readings were tumbling through the 40s," said AccuWeather.com senior meteorologist John Kocet. "The front will clear the coastline Wednesday night, shoving all rain and thunderstorms out to sea," he said, noting that the front has brought a turn to much colder weather.
"Across much of the East, the air mass change will produce temperatures 15 to 25 degrees lower than what occurred on most days this month," Kocet said. "That will come as a shock to many considering how warm it has been in recent weeks. Get used to it quick, my friends; this is nothing compared to what may come out of arctic regions next week."
ICAP's Florer said trading volume seemed light on Wednesday. "I'll be interested to see what the volume was Wednesday, because it did not feel like a high-volume move," he said. "Even if the move was on little volume, it still was tremendously strong. There was very little pulling back during the course of the day and we obviously closed near the highs."
Even though the market closed above its recent $11.030-12.070 range, Florer said he still wants to see a higher close to erase any doubt. "I think if we can get a close above $12.470, the remaining shorts will be forced to scramble out," he said. "It's sweat time."
Looking towards Thursday morning's storage report for the week ended Nov. 11, Florer said he is looking for the Energy Information Administration (EIA) to report a build of 55 to 60 Bcf, which would normally be considered very bearish.
"Like I have said before, I just don't think this injection is going to mean anything," he said. "Storage is a known quantity at this point. What matters is how cold it is this winter and how much production we can jam out."
Citigroup's Kyle Cooper is calling for a build between 52 and 62 Bcf. "A build in our range would again be considered bearish on a temperature-adjusted basis," he said.
A Reuters survey of 22 industry players expects the report to reveal a 51 Bcf injection into underground stores. Advest Inc. broker Jay Levine said he thinks the market's movement Wednesday validates his 17 Bcf build projection more than the Reuters average.
"The market certainly doesn't have 51 Bcf on its mind as the complex stages an otherwise healthy rally," Levine said Wednesday afternoon. "Maybe there is something after all about my 17 Bcf injection, or maybe it's just the market's way of reminding all of us that fundamentals are a thing of the past. Either way, it's a reminder why I pay little attention to such details."
Wednesday afternoon's ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, had predicted a 54.5 Bcf injection for the week.
The number revealed Thursday morning by the EIA will be compared to last year's no change for the week and the five-year average of a 3 Bcf withdrawal.
Other news Wednesday included the unveiling of the New York Mercantile Exchange's SquawkBox, a new real-time audio streaming product where commentators deliver play-by-play accounts of price movement from the light, sweet crude oil and natural gas futures trading rings, and the opening of an initial public offering by the IntercontinentalExchange (see separate stories).
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