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Futures Profit-Taking Subtracts 42.2 Cents Ahead of Weekend

Despite a major snowstorm that slammed the Plains and the Midwest Friday and was bearing down on the East, a number of natural gas futures traders took profits following a week of trading higher. January natural gas futures on Friday put in a low of $8.350 before closing at $8.422, down 42.2 cents on the day but 32.3 cents higher than the previous week's close on Wednesday (Nov. 22).

While some were saying that Friday's trade action reflected the "buy the rumor, sell the fact" strategy ahead of the winter cold push, others saw the sell-off as simple profit-taking.

"I really don't think Friday's pullback had anything to do with the 'buy the rumor, sell the fact' theory," said a Washington, DC-based broker. "I think people were selling because we have been up some during the week. Traders were likely taking a little bit of profit ahead of the weekend."

Despite the pullback, the broker said he still sees the up mode intact. "Bears point out that January natural gas couldn't punch through $9. I say to that...wait.

"I think we still will get through that level and I am still counting it as finishing up a five wave higher in the Elliot Wave theory. In natural gas storage we are down to something in the neighborhood of 7.5% over the five-year average, which is a considerably smaller gap than the 30% overage we had this past summer."

He noted the country still has not solved the problem of finding new sources of cheap natural gas. "The new finds are mostly difficult and expensive plays," the broker said. "All the little issues we put aside back when we were in full-fledged bear mode are back now, including all of the rigs in the Gulf of Mexico that aren't coming back. Maybe that equals 1-2 Bcf/d of gas that is now written off. That adds up over time...and we've had time. This is part of the reason we are holding our $9.25 target. Now we'll see just how long this cold weather lasts."

Another broker said the failure to stay above the $8.874 price level was a sign of weakness. "That was the high of the January contract through this whole congestion period, so it was a big technical number. When the market got over it, we shot above $9, and I honestly thought it was going further," said Steve Blair with Rafferty Technical Research in New York. "The fact that the market got back under that number Friday was very significant.

"There was a lot of profit-taking once we got up around $9 that put us right back down into that congestion area, which precipitated the further sell-off," he said. "If we had stayed above $8.874 for more than one day, it would have signified a fairly significant move to the upside. However, the failure of the market to do so means we will have to wait for the next piece of weather news before making another attempt higher."

Top traders see a market driven in the short term by changing weather forecasts, but longer-term supply factors suggesting limited upside potential. "These daily shifts in the temperature views will continue to drive price swings within this market, but with a record level of storage continuing to provide a regulator on upside pricing activity," said Jim Ritterbusch of Ritterbusch and Associates.

Ritterbusch noted that at this time of year, market expectations of cold weather get an "exaggerated upside price response," and for the moment the market continues to acquire "underlying support" as the supply surplus contracts from average levels.

"We expect a firm pricing environment through the early portion of the heavy usage period to gradually give way to a much softer atmosphere once winter needs become better defined and the funds begin to succumb to seasonal pressures by exiting the long side of the market," he said in a note to clients.

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