After pushing higher last Wednesday and again on Friday, natural gas futures — fueled by a shift to colder temperatures in near-term forecasts — appeared ready to record a third day of significant gains on Monday. While recording a high of $7.960 on the day, the December contract, which goes off of the board on Wednesday, ended up closing out Monday’s session at $7.723, up only 2.3 cents on the day.

Traders were wary of placing too much significance on December’s moves, since the contract on Monday officially entered expiration preparation. “I think what we are seeing here is the normal shuffle ahead of expiration. We have entered the last three days of the December contract and some people like to trade these three days as a group,” said Tom Saal of Commercial Brokerage Corp. in Miami. “Folks are having to either buy or sell blocks of their position and the market has to absorb that action like an imbalance. Traders are just getting their books straight before Wednesday afternoon. On Monday, it looked like we saw long liquidation, where people who were long futures contracts had to sell them to flatten out their position ahead of expiration.” With December futures caught up in expiration trading, Saal said weather pricing will probably be absorbed into January trading by the end of the week.

Saal noted that Friday’s value area of $7.668 to $7.714 was a target for trading on Monday. A value area is defined as where approximately 68% of a day’s volume is done, or as the first standard deviation of that day’s range. Using Market Profile analysis, value areas are normally targeted soon after they are established.

“Typically, you don’t open that far above your previous session value area like we did on Monday, but there was a pretty good probability that we would trade back into that area. The system has a pretty good batting average,” Saal added. “Market Profile charts for Monday revealed what is called a ‘double distribution trend day,’ where the market traded in one price area for a while, dropped significantly, then traded horizontal in a lower area for a while. With this pattern in place, if the market drops overnight Monday, the trend on Tuesday will be to buy the contract in anticipation that it would trade back up into Monday’s value area, which is $7.762 to $7.961.”

Market Profile, a form of technical analysis that was jointly developed by renowned trader J. Peter Steidlmayer and the Chicago Board of Trade, is a unique technical trading tool that has helped hedgers and traders gain an understanding of the markets, as well as find profitable trading opportunities within them. For more information on Market Profile, consider joining Intelligence Press at “The ABC’s of Trading Market Profile” seminar on Feb. 4-5, 2008 in Miami. In addition to Saal, Steven B. Hawkins, co-author of Steidlmayer on Markets; Trading With Market Profile, and Nymex local trader Sandy “Trot” Goldfarb will help traders incorporate the tool effectively into their trading strategies. More information is available at https://workshops.gasmart.com/hedging/.

Friday’s 15-cent gain to close at $7.700 was seen as a bullish sign, even if it was produced on holiday-reduced volume. The trading floor closed at 1:30 p.m. EST. Even with the week’s late rebound, the $7.700 finish was 30.1 cents below the prior week’s close at $8.001.

Despite record natural gas storage levels, traders for weeks have been tying price direction to near-term weather forecasts, noting that any change to colder-than-normal temperatures could push prices higher.

The bulls could be in luck if the latest six-to 10-day forecast from the National Oceanographic and Atmospheric Administration (NOAA) holds up. According to the government agency’s Sunday forecast, the vast majority of the Lower 48 will see below-normal to much-below-normal temperatures from Dec. 1 to Dec. 5. The only exception is expected to be the Florida Peninsula, which will see above-normal conditions.

MDA EarthSat in its most recent six- to 10-day forecast shows a slight expansion of much-below-normal temperatures to include Pennsylvania and points east as well as New England. Above-normal temperature forecasts have contracted to just the Gulf Coast region.

Even more in the near term, some forecasters are predicting cold and storms for major Midwest energy markets by midweek. According to meteorologists in Chicago, low pressure was forecast to move north out of the Gulf of Mexico into the Ohio Valley Monday spreading rain over northeast Illinois. “Cooler high pressure will follow Tuesday before the next storm system moves through from the west Wednesday, and precipitation may start as rain Wednesday but should change over to snow as much colder Canadian air sinks south into the Midwest,” said WGN Weather Center meteorologist Paul Dailey. He added that Thursday is expected to be much colder with temperatures 10 to as much as 15 degrees below late-November norms. “Computer models then project the formation of another low-pressure system in the southern Rockies Friday that could bring the first significant snow of the season to northern Illinois next weekend.”

Taking a broader perspective, it may be sharply colder in Chicago by midweek, but overall the weather pattern is not expected to deviate much from seasonal norms for the week. NOAA predicts a normal accumulation of heating degree days (HDD) for the week ending Dec.1. New York, New Jersey, and Pennsylvania are expected to shiver under 183 HDD, or two less than normal, and the Midwest states of Ohio, Indiana, Michigan, Illinois, and Wisconsin are forecast to have 217 HDD, or five more than normal. For the season, which began July 1, the Mid-Atlantic states above have tallied 1,091 HDD, or 123 less than normal, and the Midwest has received 816 HDD, or 219 less than normal.

Continued strength in crude futures could also boost natural gas prices, even though the relationship between the two markets is questionable at best. Nevertheless, some traders believe that if crude futures break through the $100/bbl mark, natural gas futures will be hard pressed not to react higher. After finishing at $98.18/bbl Friday, the January crude contract stumbled a bit on Monday to close at $97.70/bbl.

The coming cold snap and petroleum price strength has some analysts seeing bullish gas prices on the horizon. Stephen Smith of Stephen Smith Energy Associates said the temperature outlook for this week is expected to be 7% colder than normal and the week ending Dec. 7 is expected to be 23% colder than normal (see related story).

“The week ending Nov. 30 is expected to have 12 total degree day[s] above normal and a 5 Bcf surplus decrease” in storage, he said. “The week ending Dec. 7 is expected to have 38 total degree days above normal and a 63 Bcf surplus decrease.”

Looking further out, Smith said he assumes the Dec. 7 through April 4 period will have 5% less than normal HDDs, which, combined with an “extremely low level of LNG Imports,” could create approximately 150 Bcf less in storage as of April 4, 2008 than the corresponding date during 2007. “The estimated lower storage trajectory, plus a likely higher level of crude and [residual fuel oil] prices, suggest that Henry Hub prices for the coming first quarter should be higher than last year’s.”

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