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Futures Jump Back Above $10 as Market Weighs Concerns Versus Facts

Just when it looked like $10/Mcf gas was firmly in the rear view mirror, May natural gas futures revisited the price level Monday as near-term weather forecasts are looking a little cooler than first thought. The prompt-month contract shot to a high of $10.190 before closing out the regular session at $10.101, up 30.1 cents from Friday's close.

Even more surprising is the fact that the run-up in natural gas was unsupported by crude futures, especially since the commodities have been moving mostly together as of late. May crude put in a low on the day of $100.45/bbl before settling at $101.58/bbl, down $4.04 from Friday's close.

"We are just about to go bullish on our models if this price rise continues," said a Washington, DC-based broker. "We are pretty surprised with this jump. It appears there has been a little warm-up in the six- to 10-day forecast, but a little bit cooler in the eight- to 14-day forecast. However, by the time we get to the eight- to 14-day timeframe, we are talking the second week of April, so I can't really see how cold the second week of April can get.

"If the funds stayed short through the previous run-up to $10, then I don't know why they would be racing to cover right now. We are getting pretty close to the tops up near $10.280 and $10.290, so we'll see what happens if we get up there again."

Citigroup analyst Tim Evans said he saw some support Monday for the rise in natural gas futures. "The two things I saw out there on Monday were some nuclear plant outages and a strong European natural gas market, so I think those really caught the natural gas futures market short," he told NGI.

He currently sees the futures market as balanced between the upside and downside potentials. "The big picture issue to me and the reason why we got into the $9 to $10 range in the first place is because there are people who are holding some pretty substantial short positions, so there is ongoing risk of a further short-covering spike," Evans said. "If that group of traders blinks, or gets their credit lines cut and move to cover their short positions on an urgent basis, then we could blow up to $12. It's not inconceivable. At the same time, when I look at the current level of storage, which is essentially average, and we have above-average prices, then I see downside potential down into the $8.500 area over the next couple of months, when we might not have summer heat or hurricanes.

"It does not seem to me that we can maintain our level of concern regarding supply straight through the shoulder season. Currently, price levels seem to be right in the middle, balanced between the concerns of short-covering and the facts of fundamentals."

MDA EarthSat in its Monday morning six- to 10-day forecast showed below-normal temperatures from the Great Lakes to the Ohio Valley and above-normal temperatures in the southern Plains and desert Southwest. EarthSat's Matt Rogers cautioned, however, that "the operational models are again at major odds with each other as the European operational [model] is much weaker with storm passages in the Midwest and Northeast than the GFS operational. The ensembles of both models have a similar upper-air pattern, which is more aligned with the GFS operational." That alignment gave the forecaster the "impetus to maintain the active storm track," and helped pull down colder air from Canada. On a scale of one to 10 Rogers rates confidence in the forecast at five.

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