What a difference a week can make. Weighed down by forecasts for moderating temperatures and technical selling, the futures market ended the month of January on a negative note, with many traders sensing that the seasonal top was already in place. Cut to Friday, however, and the trading landscape had completely changed. Weather forecasts were calling for another wave of below normal temperatures, crude oil and its related products were testing new highs and natural gas was looking back over its shoulder at the $6.00 mark, believed unobtainable just a week before.

March closed Friday with a flurry of buying, up 21.5 cents at $6.043, the highest daily settle for a prompt natural gas contract in two years. At 85,320, estimated volume was moderate to heavy, considering it was a Friday and there was a snowstorm lashing New York.

Even as recently as last Thursday, many market watchers thought the rally was finished. After etching a new 23-month high but failing to test the $6.00 level, the sense was that profit-taking would depress prices ahead of the weekend. As it turns out, they couldn’t have been more wrong. Fueled by strength in the nearby crude and heating oil markets, natural gas futures galloped higher Friday. March crude finished 96 cents stronger at $35.12/bbl, a new 26-month prompt contract high. Meanwhile, after notching its highest level in 23 years at $1.113/gallon, March heating oil finished Friday’s session at $1.0597, up 6.9 cents for the day.

However, strength in the petroleum markets was not the only factor Friday. Also at work were revised weather forecasts showing the potential for below normal temperatures at least through the middle of the month for the Upper Midwest, Mid-Atlantic and Northeast U.S, according to the National Weather Service. Those forecasts were handed down to a market that was in the process of digging out from yet another moderate-sized winter storm that left up to a foot of snow from Richmond, VA to Southern Maine Friday.

And demand is only half of the equation. For roughly a year now analysts and consultants have been preaching about the supply tightness in this market, and on Friday the government admitted that it may have understated the supply shortfall. After saying last month that 2002 dry gas production was about 19.42 Tcf, or less than 1% down from the 19.45 Tcf produced in 2001, the Energy Information Administration is now saying 2002 production was only 18.86 Tcf and 2001 production totaled 19.37 Tcf, for a decline of about 2.3% (see related story). And although that decline falls short of the 4-6% drop bandied about by the private sector, it represents an admission on the part of the EIA that their numbers have not been adding up.

Nowhere has that shortfall been more noticeable than in the weekly underground storage data. Since beginning the withdrawal season on Nov. 1 with nearly 3.2 Tcf, the market has pulled on storage gas at a extremely heavy rate, leaving supplies less than 50% full with two full months left in the withdrawal season. “If we pull from storage at the five-year average withdrawal rate for the next eight weeks, we will have a season-ending inventory of roughly 850 Bcf,” said Greg Parks of Providio Trading Consultants in Chicago.

However, he feels that to assume the five-year average rate of withdrawals is too conservative, considering the tightness of supply and the weather forecasted for the middle part of February. “I have calculated that we have drawn about 40 Bcf more per week than the five-year average thus far this season. Going forward, we are likely to see another 200 Bcf [this] Thursday, and with temperatures again expected to be five-15 degrees below normal [this] week, the following report should feature a large withdrawal as well.”

That being said, Parks believes storage could plumb down to the 500-600 Bcf level by March 31. The previous season-ending low was 697 Bcf set back in 1996, according to EIA data. “If we do get down to those levels, then we will see much higher price levels. Seven dollar prices would be almost guaranteed and $8 or $9 are not out of the question. Should prices really spike, I could see $11 notched by the April contract,” he predicted.

In daily technicals, natural gas has paved the way for further gains, having broken through the top of the rising channel that was limiting the market’s trading range for the last five weeks. That level of failed resistance, which is now seen as support, comes in at $5.93. The upside is a little more difficult to pin down right now as there are no recent landmarks for technicians to use. A 62% Fibonacci retracement of the $10.10 to $1.76 move points to $6.99, which coincides nicely with the next psychologically important mark at $7.00.

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.