Feeding off Thursday’s late-day price surge, the natural gas futures market soared higher Friday as fund traders covered shorts on increasingly constructive technical factors. The rally came as a surprise to traders — many of whom had favored a delayed bearish reaction to the seemingly price-negative storage news received by the market Thursday morning (32 Bcf injection).

The December contract led the way, advancing 31.5 cents to close at $5.112. At 117,750, heavy volume in the gas pit was proof of speculative activity.

For the last couple weeks, market watchers have maintained that a move higher would be predicated on one of two conditions: a commercially led, weather-driven advance or a short-covering rally propelled by non-commercial fund buying. “It certainly wasn’t the weather,” a broker quipped.

Though a quick-hitting system deposited up to couple feet of snow in the mountains of northern New England Friday, the winter weather is not expected to last. In fact, armed with the latest weather forecasts for this week and next, ski area operators across the Northeast Friday were starting to second-guess their plans to be open for the Thanksgiving weekend — historically a time when some ski areas have one-third or more of their trails open for schussing.

According to the six- to 10-day forecast released Thursday by the National Weather Service, above normal temperatures are expected across the vast majority of the Lower 48 this week. If that forecast plays out as expected, the natural gas futures market will have made it three-fourths of the way through the month of November with only a few days of normal or below normal mercury readings.

Having eliminated the weather as a culprit behind the 30-cent price hike Friday, market watchers were left only with fund buying to explain the advance.

“This is fund buying pure and simple,” noted Tom Saal of Commercial Brokerage Corp. in Miami. “They are shedding some of that large net-short position they have been building for some time now,” he continued, referring to the latest Commodity Futures Trading Commission Report released Friday showing a non-commercial net short position of roughly 52,000. Unfortunately, because that report only includes trading through last Tuesday. (Nov. 11), the market will have to wait a week to know exactly how many positions the funds liquidated Friday.

Looking back at the behavior of these non-commercial traders, one can attempt to predict the impact on prices should they elect to continue to cover their short holdings. From February 2002 to February 2003, non-commercial traders reversed themselves from a net short holding of 53,000 to a long position of nearly 33,000. During that period, prices rose from $1.85 to slightly more than $10.

But just because the funds have bought back some of their shorts, it does not necessarily mean they are ready to eliminate them from their diets completely. History has proved that while funds typically follow trends, they can sometimes act erratically in their trading decisions.

For example, a month ago the non-commercials liquidated a hefty 18,000 of their 34,000 net short holdings during the week ending Oct. 14 only to turn right back around and short 13,000 of those positions again in the following week. The futures price during that period was equally volatile, and mostly correlated to the trading activity of the funds. Prices rose from $5.14 to $5.475 when the funds were covering only to drop back to $4.875 when they re-established their shorts.

Impressed by December’s ability to hold on Friday afternoon and notch a settlement above $5.05, George Leide of Rafferty Technical Research in New York is now bullish in the intermediate term. “We could see $5.27-37 in a hurry,” he said, referring to the next level of potential selling. An additional level of resistance is seen in the $5.65-70 gap notched by the December contract on Oct. 17, he noted.

Looking to add to his string of closely predicting the EIA storage report, analyst Stephen Smith preliminarily calls for a 24-27 Bcf net withdrawal in this Thursday’s storage report. “[Last] week was the first week since early October that heating degree days were at or above normal,” he said of the 120 regional weighted HDDs versus 119 normally. “That compares with only 75 HDDs [the week prior]… and increases demand by 8.6 Bcf/d.” Last year at this time the EIA reported a 1 Bcf withdrawal and the five-year averages out to an 18 Bcf takeaway.

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