Buoyed by a new, 11-month high in the nearby crude oil market, the natural gas futures market shrugged off early weakness Monday to notch double-digit advances for the session. The April natural gas contract finished 13.4 cents stronger at $5.550, the highest prompt month closing price in nearly a month.

At 77,950, estimated volume was moderate to heavy and adds credibility to the price rise.

With little news of its own on which to trade, the natural gas futures market turned to its hydrocarbon brethren for price direction Monday. Buoyed by rhetoric from Venezuelan President Chavez suggesting he would use oil as a means to stave off opposition calling for his resignation, crude oil futures rallied to price levels not seen since the run-up just prior to the invasion in Iraq last year. April crude finished up 2% at $36.86.

The session-long rally in natural gas futures puts traders in somewhat of a predicament heading into Tuesday’s trading session. Not only is the April contract in a severely overbought condition, it is commanding nearly a 40-cent premium to prompt month spot gas prices. NGI’s Henry Hub price averaged $5.17, Monday, down a dime from the weekend.

And while it is not that big a deal when cash prices lag the futures market in the summer, fall, or early winter, it is exceptionally uncommon for the market to experience this sort of situation in late winter and early spring. Under normal circumstances, futures markets in general have successively higher prices going out in time due to the time value of money. In the natural gas market, the use of underground storage is another factor that creates this forward carry or contango price structure.

From April through October the industry takes advantage of what are supposed to be lower priced supplies in order to have excess gas on which to pull from during the winter months of November through March. During the summer months, it is forward carry price structure of the market that drives injections. In the winter months, however, there are several things that drive withdrawals. One is necessity — demand exceeding supply. Another are the obligations specified in contracts between storage owners and operators. The third is purely economic: Is it more profitable to pull from storage or buy in the spot market?

With the weather across the country relatively benign and the market in a state of backwardation (opposite of forward carry), it is safe to say that storage is not flowing too rapidly out of the ground, and that is likely to be reflected in both this and next Thursday’s storage release. Early expectations ahead of this week’s report call for a net withdrawal of 110-120 Bcf. If realized, a number of that magnitude could work in favor of the bears, as it would fall dramatically short of the recent string of large draws as well as the year ago analog of 176 Bcf.

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