Natural gas futures exploded to the upside Tuesday morning as traders reacted to private weather forecasts suggesting the December thaw will be short-lived, and temperatures will return to below normal by the end of the month. After gapping higher at the opening bell, the market was quickly whisked above recent highs by buy stop-loss orders positioned in the mid to upper $4.40s. The January contract finished at $4.636, up 27.7 cents for the session and within easy striking distance of six-week contract highs at $4.66.
According to Salomon Smith Barney meteorologists Jon Davis and Mark Russo, the next 10-12 days will feature above normal temperatures for a “vast majority” of the country. “In general, there will be a total lack of arctic air during this period…This will cause heating demand to drop to below normal level in virtually all of the major population centers in the central/eastern U.S., which is a big change from the past three weeks,” they wrote in an forecast update to clients Tuesday.
Beyond the next 12 days, however, there are indications that colder air will return into the lower 48 states. “Early indications are that cold air will initially push down into the Rockies [and] the Plains, and then work toward the East Coast…[The] indications of this surge of cold air have been very consistent over the past few days and have been on all of the extended computer guidance,” they continued.
And while the buying was set in motion by bullish weather forecasts, it was perpetuated by technical buying. “We ran through stops above $4.44,” offered Ed Kennedy of Commercial Brokerage Corp. in Miami. “More short-covering than anything. The next big test is $4.66. A settlement above that level would make $5.00 a done deal,” he reasoned.
The decision by traders to place stop-loss orders above $4.44 was a easy one. Over the past 14 trading sessions, the January contract had tested resistance in the $4.40s seven times, but on each occasion failed to pierce through it. Traders’ strategy was simple, sell the market on moves toward resistance and protect that position with a buy-stop placed in the mid to upper $4.40s.
Heading into Tuesday morning’s session the futures market was in a wait-and-see mode. While six- to 10-day forecasts by the National Weather Service have been consistent with Davis in calling for above-normal temperatures, the storage situation has been decidedly bullish. As a result traders opted to do little or nothing Monday, leaving the market to move quietly downward. January closed at $4.359 that day, down 2.4 cents for the session.
Looking ahead, traders look for an initial thrust toward the $4.66 level. Should the market run into heavy overhead selling likely up there, look for profit-taking ahead of the release of Thursday’s storage report. Withdrawal expectations ahead of that report vary from as little as a 100 Bcf pull to as much as a 150 Bcf drawdown.
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