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Future Finish Strong Despite Expected Warm-Up

Following a topsy-turvy week of trade that featured a deep freeze in the Midwest and East and a mammoth 259 Bcf storage withdrawal report for the week ended Feb. 9, March natural gas futures on Friday explored higher price levels. The prompt month put in a high of $7.620 before settling at $7.503, up 21.1 cents on the day but 32.4 cents lower than the previous Friday's close.

After experiencing a 60.1-cent drop Monday, the bulls and bears traded blows for the remainder of the week, which featured sub-15-cent moves in both directions prior to Friday's fairly strong finish. The week also saw the near-record storage withdrawal Thursday, which failed to really faze traders. The all-time record withdrawal of 260 Bcf, which was set during the week that ended Jan. 17, 1997, is safe for now

While perplexed by the market's erratic movement during the week, on broker noted that Friday's "strong" finish could portend things to come. "I think we ended the week on kind of a strong note," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "Since the first of the month, we've been saying that a trading range has been developed between $7 and $8. On Friday we settled exactly in the middle of the range."

Saal noted that the question out there is what happens when temperatures moderate in the near term? "The bears think the market is going to collapse and the bulls think it may be adequately priced right here, if not a little bit higher. I am in the bulls camp here. I think a lot of gas is being pulled out of storage and the bearishness that was once surrounding the year-over-five-year average surplus has been greatly diminished. The surplus is still being reduced as we speak. All you have to do is step outside and feel the chill.

"This is why I think we will test $8 next week. Even if cash prices can't hold their peak prices in the $9 area, they would likely only fall into the area that March futures are now. Most of the forecasters are calling for a warm-up, so we will have to see if it warms up and stays warm. AccuWeather is saying it is going to moderate and then get cold again. It really is that time of year where it becomes 'bet the forecast.'"

Some forecasts provide a muddled picture. Looking at the National Weather Service's eight-to-14-day forecast covering Feb. 24-March 2, the East Coast states, a majority of the Southeast and Minnesota are expected to exhibit above-normal temperatures while the West should see below-normal conditions. The vast section in between is slated to experience normal temperatures for this time of year.

MDA EarthSat in its most recent six- to-10-day forecast shows little change from an expansive area of above-normal temperatures east of a line from North Dakota extending as far south as West Texas.

Some top traders see little additional price influence from weather-related draws on natural gas inventories. The next "reported draw could prove to be the last large decline of the season in view of current mild temperature forecasts for a major warming trend across the Midcontinent [this] week that will likely extend into the month of March," noted Jim Ritterbusch of Ritterbusch and Associates. He added that an influx of cold air next month could spark a rise in cash prices, but such a development would likely "have little impact on a season-ending supply surplus against average storage levels."

Prices may not have much more room to the downside. Spot futures on March 31, 2006 settled at $7.210. Weather bears ultimately had the upper hand last year but it took a featureless hurricane season to tug spot futures to a low of $4.070 by Sept. 27, 2006.

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