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Natural Gas Futures Soar on Cold Front, Petroleum Sympathy

Coming out in a big way during its first action as front month, January natural gas futures on Wednesday soared higher as the wave of cold Canadian air swept eastward. After threatening the psychological $9 level with a high of $8.940, the prompt month ended up closing Wednesday at $8.871, up 31.2 cents from Tuesday's close.

Citigroup analyst Tim Evans said he believes the move higher in natural gas futures was sparked by a combination of factors. "In addition to the incoming cold weather, sharp gains in the petroleum futures markets certainly did not discourage anybody from buying natural gas today," he said.

On Wednesday, January crude futures climbed $1.47 to close at $62.46/bbl, while December heating oil and December unleaded gasoline climbed 6.70 cents and 4.40 cents, respectively, to close at $1.7953/gallon and $1.6706/gallon.

Addressing the coming weather pattern, Evans said that while it looks to be "significantly colder than normal," it appears like it won't be as severe as the cold snap experienced in December 2005. "In terms of the storage implications, we can anticipate a larger-than-average draw for the week ending Dec. 8, 2006, but not necessarily coming anywhere near the 182 Bcf that was sucked down for the same week during 2005." He added that the 182 Bcf withdrawal was only the date-adjusted number. The actual withdrawal for that week last year was 202 Bcf. "That is just a very high benchmark. We are not going to see that."

Evans said the comparisons to last year are very interesting. "As of Nov. 17, 2006, storage was 5.3% higher than a year ago, so we have more storage and a less severe cold snap. Maybe that produces an echo of last year's spike to $15.78 -- but very unlikely a replay of it."

The analyst said the upside "certainly appears open now" with some cold now coming into the picture. "The December futures contract did an awful lot of sideways chop, which lead up to this more emphatic move," Evans said. "There are plenty of the sellers of the last six weeks looking to adjust their position and you don't unwind six weeks of trade in one session, so that would suggest further upside in this market."

The inexorable march eastward of winter cold continues. Meteorologist John Dee expects a big drop in temperatures for the eastern half of the U.S. in the next few days. "A large area of the season's coldest air so far will slowly work east across the U.S. making it to the Mississippi River by [Thursday] and then into the eastern seaboard by the weekend." He is expecting temperatures ahead of the cold will run well above average, but then drop 20 to 30 degrees behind the front.

Further out, the cold is expected to linger from the Ohio Valley to the eastern seaboard into next week and "produce the first true winter-like demand for heating energy in the major metro areas of the Midwest and Northeast U.S."

Market technicians are having difficulty interpreting the current price action, but tend to favor lower prices. The highs reached with Tuesday's expiration of the December contract were not expected. "At this point the wave count is extremely difficult to unravel," said United Energy's Walter Zimmerman prior to Wednesday's trade. He said that the market shows "a high risk of peaking action" and this is consistent with seasonal factors as well as RSI (Relative Strength Indicator) divergence.

Looking at the Energy Information Administration's (EIA) Thursday morning storage report for the week ended Nov. 24, Evans said he is looking for a withdrawal of about 30 Bcf. "This one is a little tough to gauge because of the Thanksgiving holiday," he said. "Some holidays have an impact on demand and some don't."

A Reuters survey of 22 industry players predicted a 24 Bcf withdrawal, although the range of withdrawal estimates runs from 5 Bcf to 43 Bcf. The ICAP storage options auction on Wednesday resulted in an expected weekly storage withdrawal of 23.7 Bcf. According to the EIA, 43 Bcf was withdrawn last year during the same week and the five-year average pull for the week is 22 Bcf.

According to Golden, CO-based Bentek Energy's Flow Model calculation, the company projects a net storage withdrawal of 20 Bcf this week, resulting in 3,429 Bcf of gas in storage. "This level is 7.6% above the five-year average and 3.2% over the five-year high," the company said. The flow model is calling for a 20 Bcf withdrawal in the East region, a 2 Bcf withdrawal in the Producing region and a 2 Bcf injection from the West region.

"As indicated in our past two Storage Outlook reports, Bentek initiated publication of a new Natural Gas Supply/Demand Balance Report that provides an alternative calculation model for storage injections and withdrawals," the company said. "This week our S/D Balance model projects a 13 Bcf [withdrawal] compared to 20 Bcf [withdrawal] in this report's Flow Model, indicating a very slight positive bias to our weekly projection (i.e., the potential for a slightly lower withdrawal number). As we gain experience with this new model methodology we believe that our alternative S/D Balance Model will provide a useful complement to our Flow Model methodology."

The company noted that six storage facilities continue to indicate storage above maximum capacity this week, while 11 facilities are between 95% and 99% of capacity.

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