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Despite Moderating Temps, Futures Remain Firmer than Expected

With temperatures moderating throughout the Midwest and most of the East, March natural gas futures explored lower price levels for a majority of Tuesday's regular trading session. However, thanks to a late round of buying, the prompt month pushed higher to close at the day's high of $7.585, up 8.2 cents from Friday's close.

With the East coming out of its two-week long deep freeze, traders on Tuesday first tested lower price levels, only to find support down at $7.250, which ended up marking the March contract's low for the day. After bouncing off that support, the prompt month moved higher. Despite Tuesday's actions, some market experts hold that there is not enough winter left to make any real impact on storage or prices.

"I think this market really doesn't give a damn about storage right now. It obviously is not concerned after looking at last week's storage report," said Steve Blair, a broker with Rafferty Technical Research in New York. "We had a near record withdrawal and the market stood pat. If the market was really concerned about the amount of gas removed from underground stores over the last two weekly reports, this market would be well over $8.

"Unless we come up with some extreme withdrawals over the next few weeks, the impact of storage on the market is not an issue anymore. The next issue is weather," he said. "While weather ties into storage, the market really is not concerned with temperatures right now either. We don't have really warm temperatures yet, so we are still going to see fairly normal withdrawals. This is probably preventing us from really breaking down to the downside."

Calling the current market a "technically driven, range-bound market," Blair said the major support and resistance numbers have not changed over the last two weeks or so. "On the downside, we have support at $7.000 and $6.800," Blair said. "Last week, we got down to $7.050, so we got pretty close to testing major support before rallying. On the upside, the first major resistance number is at $7.600, followed by $8.070. We also have minor support down at $7.380 and $7.200 and minor resistance at $7.800. We broke below the $7.380 level Tuesday and reached $7.250, which resulted in a bounce to the low $7.30s. We hung in that area for a couple of hours before breaking higher. I think this market is currently playing a back and forth game between major support and resistance. I think it will keep doing this until it finds a reason to break out in either direction. It certainly doesn't seem like we are going to have the weather necessary to break out to the upside."

AccuWeather reported a warming trend in the eastern energy markets that only last week were subjected to bone-numbing cold. "The Northeast will have pleasantly milder conditions Tuesday, and for many places, the air is already significantly warmer [Tuesday morning] than 24 hours ago," said AccuWeather meteorologist Kristina Baker. Arctic air is not able to blast into the region because the dip in the jet stream will trek to the east rather than the south, she added.

The National Weather Service (NWS) data confirm the abrupt change in conditions. For the week ended Feb.17, the NWS reported 306 heating degree days (HDD), or 57 more than normal for New York, New Jersey and Pennsylvania, and for the industrialized Midwest states of Ohio, Michigan, Indiana, Illinois and Wisconsin, 349 HDD were tallied, or 81 more than normal.

How quickly things change. For the week ended Feb. 24, the NWS forecasts 240 HDD for New York, New Jersey and Pennsylvania, or 3 more than normal, but for the Midwest states, only 221 HDD are predicted, or 31 below normal.

Top traders believe natural gas prices will either follow petroleum prices higher or lower, or derive their direction from weather forecasts. "The next [natural gas] market move will either be [following] the breakout of the [petroleum] complex trading range [either up or down] or the 10-16-day weather forecast," said Mike DeVooght, president of DEVO Capital, a Colorado trading and risk management firm. "If the forecast calls for the warm weather in the West to move East and hang there, gas prices could break sharply. On a trading basis, we believe any rallies approaching the highs of a couple of weeks ago represent great selling levels if you have not already done so. We will hold our current short positions," he advised clients.

DeVooght urged end users to stand aside and producers to hold short 25% of production for the winter 2006-2007 season earlier hedged at $11.950, and holding short an April-October strip at $8.000 for 25% of that period's production. He also advised staying short a summer strip at $7.600 for 50% of production and holding a short position of 15% of production for the winter 2007-2008 at $9.000.

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