Prolonged colder than normal temperatures pushed front-month natural gas futures to nearly a five-month high on Monday as the February contract started the new year off with a bang.
The February contract reached a high of $4.689 on Monday before closing out the regular session at $4.650, up 24.5 cents over Friday's finish. The last time front-month futures traded higher was on Aug. 5, 2010, when the September 2010 contract posted a high of $4.825.
"The natural gas market has jumped higher in early 2011 trade as it looks like colder-than-normal temperatures have persisted longer than the bearish selling flow that had previously had the price contained in the $4 area," said Tim Evans, an analyst with Citi Futures Perspective in New York. "The conventional wisdom, that any 'mere' weather rally was a clear selling opportunity, has been undermined, if not proven clearly wrong."
Those looking for an explanation of Monday's 6% uptick in futures values really only need a glimpse of the National Weather Service's near- to mid-range forecasts Sunday. In both the six- to 10-day and eight- to 14-day forecast the entire Lower 48 is draped in varying shades of blue to denote below-normal to much-below-normal temperatures. In fact, neither forecast called for any normal or above-normal conditions anywhere within the Lower 48. Monday's updates to the two forecasts showed some normal temperatures entering the West Coast and the Northeast, but a vast majority of the country was still expected to exhibit below-normal to well-below-normal temperatures.
Based off current forecasts, Evans said he is projecting above-average storage withdrawals through at least the week ending Jan. 21, which could almost completely wipe out the year-on-five-year storage surplus.
"Of course, the forecast could moderate from the severe cold projected now, but below-normal readings could also persist beyond Jan. 21 and with more than half the heating season still to go, surplus inventories certainly can't be taken for granted," he said. "We continue to see potential for a further rally toward the $5 level."
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