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Demand Setting Records, But Cold Putting Bears In Hibernation

January natural gas is expected to open 5 cents higher Tuesday morning at $4.28 as traders focus on the demand side of the equation and weather forecasts continue to call for bone-chilling cold. Overnight oil markets rose.

Forecasters were caught off guard as temperatures in the Midwest dropped more than anticipated. "Temperatures plummeted this morning in the Chicago area, dropping O'Hare at least eight degrees colder than our forecast low from just yesterday (-2F so far)," said Matt Rogers, president of Commodity Weather Group, in the firm's morning six- to 10-day forecast.

"High pressure and snow cover have an ability to surprise guidance to the significantly colder side, and that issue could continue to offer colder risks for the coming days in both the Midwest and newly-snowed East. Otherwise, the six-10 and 11-15 are not as cold as the one-five day, but still offer plenty of cold weather opportunities yet. The latest round of modeling still shows plenty of cold air in Canada, but some increase in warmer Southeast ridging in the 11-15 day could expand into the Mid-Atlantic and Northeast, too at times. Ridging in the east Pacific still acts as a 'gatekeeper' preventing a bigger Pacific warm flow and allowing cold air entry yet."

Traders see the market as overextended. "This market continues to surge higher off of weather considerations where focus has shifted from the demand to the supply side," said Jim Ritterbusch in closing comments to clients Monday. "Since we didn't see anything within the weekly updates to the short-term temperature views as capable of forcing fresh highs, we are proceeding on the assumption that widespread well freeze-offs due to the adverse weather conditions drove much of today's advance with power outages providing some offset.

"Although [Monday's] advance carried further than we had anticipated, we have allowed for the fact that limited chart resistance develops until about the $4.30 level. Although we have shifted from a short-term bullish to a neutral stance since we are viewing current price levels as unsustainably high, we will nonetheless caution against attempts to pick a top to this strong rally of the past month."

Demand may be stout in the "newly-snowed East," but gas flows in California continue to set records. Genscape reported that California demand continues to reach new highs. "This week, daily average temperatures in Southern California reached just 50 degrees, 8 degrees below seasonal norms. This helped lift total California demand on Sunday to 11.7 Bcf/d, a single-day high. This December has featured seven days that now rank among the top 10 highest single-day demand levels in Genscape's history set for California. Month-to-date demand [MTD] is now averaging 9.74 Bcf/d, nearly 2.7 Bcf/d greater than last December MTD, and 0.8 Bcf/d above the prior three-year MTD average."

Tom Saal, vice president at INTL FC Stone in Miami, in his work with Market Profile is looking for the market to test Monday's value area at $4.237 to $4.195. Saal also cites trend-day "space," which can act as a pricing target at $4.013 to $4.044.

In overnight Globex trading January crude oil rose 93 cents to $98.27/bbl and January RBOB gasoline added a penny to $2.6877/gal.

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