With the month of December -- and the cold it normally brings -- right around the corner, natural gas futures traders on Monday forced the December natural gas futures contract back above $4 for the third time in just more than a week. The prompt-month contract reached a high of $4.106 before closing Monday's regular session at $4.088, up 15.1 cents from Friday's finish.

Gene McGillian, an analyst at Tradition Energy, said the expectations of upcoming heating demand is really putting a squeeze on the short positions in the market.

"We pushed back up above $4 for the second time this month and it looks as if the market's focus on the upcoming winter is helping put pressure on the shorts," he told NGI. "We're seeing some cooler forecasts for later this month, which will likely boost heating needs. We saw some of the shorts exit last week during the rally to $4.200 and I think we're seeing some more covering starting up again. Really this how we'd expect the market to act as it approaches the month of December."

That said, McGillian said the bearish fundamental picture will likely keep the upside on a fairly tight leash. "Even though we have what looks like will be a record all-time level of gas in storage coming up in the report this week and the signs that production continues to remain robust, I think the market is focusing on heating needs right now, Until we get some of that priced in, I think we have some further advances in front of us. I think the market could get to $4.400 to $4.500, but I'd be hesitant to go much higher than that at this point. If we get more extended bouts of cold weather, then the rally could continue, but for right now, given the overhanging fundamental picture, I think you have to put resistance right around the $4.400 to $4.500 level."

The first hurdle is $4.200, the analyst said. "Once we get through $4.200 I think the charts are going to open up that next 30 cents to the upside," McGillian said. "After that, it's going to come down to whether the weather forecast is strong enough to put the feet to the fire of the shorts in the market. As we saw in Friday's Commitments of Traders report, basically 20,000 positions in the managed money shorts were erased. The first rally forced some short-covering, and I believe a push above $4.200 will bring about another round.

"The funds have been pretty short for a while. The thing that will emerge as we push back up, the funds will begin to realize that some of the money they have in the market is under pressure, so they'll look to take some more out."

Traders concerned with the market's next move may not be making a wholesale shift to the long side of the trading ledger but government figures show there was a strong move to exit short positions.

The Commodity Futures Trading Commission in its Nov. 2 Commitments of Traders Report showed managed money exiting short positions by a 3:1 margin over long positions. At the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) fell by 25,511 to 274,686 and shorts rose by 21,355 to 194,140 contracts. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by 600 to 127,019 and short contracts fell by 23,545 to 189,636. When adjusted for contract size longs at both exchanges fell by 5,778 futures and options, and shorts declined by 18,206.

Some of the top traders see the market as an opportunity for speculative longs. "Natural gas continues to be one of the weakest commodities on the board, while most of the major commodities posted strong gains this past week," said Mike DeVooght, president of DEVO Capital, a Colorado trading and risk management firm. He added that the news last week "could be seen as a positive for the gas market. If the strong employment numbers are an indication that the U.S. economy is starting to grow, an uptick in gas demand could be near. Even though the supply picture is negative, an uptick in demand could spark the short-covering rally we have been anticipating."

DeVooght recommended that on a trade basis "we will hold current positions. For speculators we will probe the long side of the market [this] week," he said in a note to clients.

DeVooght recommends that end-users stand aside and producers continue to hold what is left of a 12-month $5.50 put offset by the sale of a $7.50 call that was begun in December 2009. He advised trading accounts to buy January futures at $4.05 to $4.10 and risk 22 cents on the trade.

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