Following its close above $4 on Monday, the December natural gas futures contract continued to march higher on Tuesday to a peak of $4.228 before closing the regular session at $4.210, up 12.2 cents on the day.
In total, the front-month contract has gained 27.3 cents this week as market watchers speculate that traders are beginning to gear up for winter heating demand, which in turn is flushing out some short positions held by the funds.
"This rally would appear to have some legs, but I'm not sure just how far it can run with the current fundamentals situation," said a New York trader. "We've got a near all-time record of gas in storage, production continues to remain robust and the 2010 Atlantic hurricane season would appear to be a bust in terms of Gulf production interruption. I think this uptick is a result of perceived winter cold. No, it is not expected to be any sort of extremely cold winter, but the thinking is it will be cold enough to make some of this gas disappear."
Tradition Energy's Gene McGillian told NGI on Monday that the first hurdle for the rally was a close above $4.200, which was accomplished Tuesday (see Daily GPI, Nov. 9). "Once we get through $4.200 I think the charts are going to open up that next 30 cents to the upside," he said on Monday.
In spite of recent gains, weather bulls will have little to hang their hats on if projections of near-term heating requirements prove correct. The National Weather Service for the week ending Nov. 13 forecasts only normal heating load for New England and the Mid-Atlantic and below-normal requirements for the Midwest. New England is expected to have 158 heating degree days (HDD), or two more than normal, and New York, New Jersey and Pennsylvania are forecast to see 137 HDD, or six fewer than normal. The Midwest from Ohio to Wisconsin is anticipated to see 107 HDD, or 54 fewer than normal.
Although the weather outlook is at best mildly constructive, analysts point to seasonal and technical factors to explain recent market strength.
"This market has not seen a significant fourth quarter seasonal advance this year, and the ongoing strong rally could be fulfilling seasonal expectations as the funds pare a sizable net short position," said Jim Ritterbusch of Ritterbusch and Associates. He added that "within any short-term time period of four to five days, a price advance can easily develop and can become self-sustaining as the near-term chart picture improves. As this week's trade has progressed, it appears that [Monday's] advance to above the $4 mark triggered some technical buy programs that have pushed values to higher levels than would appear supported by a shift in the supply-usage balances."
Taking a peek ahead to Wednesday's special release of natural gas storage data, Citi Futures Perspective analyst Tim Evans is expecting just a 9 Bcf injection for the week ending Nov. 5. The number -- to be revealed one day ahead of its normal schedule at 12 p.m. EST due to the Veteran's Day holiday Thursday -- will be compared to last year's date-adjusted 26 Bcf build and the five-year average addition for the week of 29 Bcf.
Last week's 67 Bcf injection for the week ending Oct. 29 turned what was a year-on-year deficit into a year-on-year surplus (see Daily GPI, Nov. 5). The injection also brought current inventories within 17 Bcf of surpassing last year's all-time record level of 3,837 Bcf, notched for the week ending Nov. 27, 2009.
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