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Futures Jump 30 Cents on Cold Weather Expectations

After taking a breather on Thursday from the up move, natural gas futures traders resumed course on Friday, putting in a high of $6.640 before closing out the week at $6.601, up 30.9 cents on the day and 41.7 cents higher than the previous Friday's close.

Friday's rally loaned the week's move higher a little more credibility as traders assessed just how cold it is going to get, where, and for how long. After gaining 57.1 cents during the first three trading days of the week, February natural gas stumbled on Thursday with a 46.3-cent drop.

With storage still at more than comfortable levels as the calendar continues deeper into January, Citigroup analyst Tim Evans warned that price strength in futures could be hard to sustain. "Unless something significant occurs to bring down storage before Groundhog Day, which marks the midpoint of winter, I think it is going to be difficult to extend the price rally much past the beginning of February unless we get an additional blast of prolonged cold air."

Commenting on the recent choppy trading activity, Evans said he sees a lot of parallels with the late-November/early-December period. "We have a little bit of a similar weather pattern and we have a similar price pattern in terms of the three steps up, one step down...cha cha cha. We are chopping sideways to higher, but we are not able to trend smoothly, which is also similar to that trend late last year."

As for the idea that winter might be just now showing up, Evans quipped, "Instead of this winter just being one week in December, it now looks like it will also include two weeks in January. We will have to see how long these colder temperatures are with us and what kind of weather pattern will follow. The rest of the winter looks like it might be somewhat warmer than normal, but we are not going to see those extreme warm temperatures that we have seen the last six weeks."

Late in the week, traders were forced to reassess the often-doubted price correlations with the petroleum complex. In assessing the sharp decline Thursday in natural gas futures, analysts had been reluctant to attribute much of the impact to the slumping crude oil market. There are indications that investor dissatisfaction with crude oil and energy in general rather than specific fundamental developments was the rationale for Thursday's 46.3-cent plunge in the February natural gas contract. "I didn't think that in order for natural gas to stabilize, it would have to find support from crude oil until [Thursday]," said Bill O'Grady, vice president of AG Edwards in St. Louis. He admitted he hadn't run any models recently to ascertain the correlation between crude oil and natural gas prices, but "you can always use the 6:1 ratio (6 MMBtu per barrel), and natural gas comes out cheap." After dropping another $2.14 on Thursday to close at $51.88/bbl, February crude on Friday rebounded $1.11 to $52.99/bbl.

"The heavy storage is not helping the bullish case either. Up until [Thursday], I thought crude oil and natural gas prices should take different directions, for their physical substitutability is minor. However, investors have decided they do not want to own commodities, and energy in particular, and it is hard to see how natural gas is going to avoid that," O'Grady said. "I don't think the decline in crude oil is based on the fundamentals, but more a decision by investors to stop putting money into commodities such as energy or withdrawing from the markets altogether. The Goldman-Sachs commodity index [GSCI] is heavily weighted in energy, and investors are bailing out of that." The January GSCI traded on the Chicago Mercantile Exchange settled at 391.10 Thursday, down 9.90.

Floor traders Thursday observed that the normally market quake at the 10:30 a.m. release of the Energy Information Administration's (EIA) inventory report caused barely a tremor, and suggested that the catalyst for the natural gas decline lay in the crude oil ring. "The [49 Bcf withdrawal for the week ended Jan. 5] number was unchanged from expectations and had zero impact on the market. Natural gas had been strong all week as crude oil prices fell, but finally the weakness in crude oil became too much, and natural gas bulls capitulated and sold," said a New York floor trader.

Despite the Martin Luther King Jr. holiday on Monday, the EIA said its natural gas storage report for the week ended Jan.12 will be released as usual on Thursday, Jan. 18 at 10:30 a.m. EST.

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