After exploring lower Thursday on a bearish natural gas storage report, January natural gas futures took the chance to jump back to the high side in Thursday night Access trading and again on Friday. The prompt month settled Friday at $7.457, up 45.7 cents for the day and up 61.4 cents for the week.

Creeping 32 cents higher Thursday night, the prompt month began Friday’s regular session at $7.32, only to continue its hike higher. January motored through the perceived $7.40 resistance level to notch a daily high of $7.54 in morning trading.

“We’ve got some short-covering probably by funds and some short-covering by [commercial traders] ahead of the weekend because obviously the weather forecasts are showing some cold weather next week,” said Tom Saal of Miami-based Commercial Brokerage Corp.

“I don’t know what significant number people were looking for in terms of what level brought more fund-buying into the market,” he added. “Some said $7.42 was a Fibonacci number that might have brought in some fund-stops. As for the next resistance level, I am looking at $7.68.”

The action on Thursday night and Friday came in stark contrast to the trading that took place during Thursday’s regular session, when a 61 Bcf draw for the Dec. 10th ending natural gas storage report sent January futures down 23.6 cents on the session to settle at $7.00 (see Daily GPI, Dec. 17). While much of the market expected such a pull, the comparison to historical data certainly gave the report a bearish tint.

“The natural gas market continues to shrug off the large and rising 14.3% year-on-five-year average [Department of Energy] storage surplus as irrelevant to the course of prices, apparently convinced that it doesn’t matter how much inventory there is; colder temperatures and rising heating oil prices are really all that matter,” said IFR Energy Services’ Tim Evans. “While that kind of thinking may [have carried] the day, it is quite a dangerous idea from an intermediate to longer-term perspective.”

On Friday, January heating oil settled 5.83 cents higher at $1.4395/gallon, while January crude jumped $2.10 to close at $46.28/bbl.

Evans said taking prices higher now will only “build in an additional premium” to where the futures market would normally trade with this type of surplus, which could set up an even larger drop once a warming trend emerges. Evans added that the market could also calculate that not only will storage last the balance of the winter, but some significant portion of the surplus might likely survive as well.

“The rebound today rejects Thursday’s downside reversal, but sets the $6.90 low from that session clearly in place as the pivotal support within the recent range,” he said. “An eventual break of this weekly low is likely to put heavy pressure on the $6.495 floor from Dec. 8, which also looks like major support on the weekly spot continuation chart.”

Once below that, Evans said the $6.30 January contract low from Sept. 10 will be “hard pressed” to stem the decline, with prices tumbling toward projected support at $5.10 or the $4.52 spot low from September instead. “These lower levels are only a rough match with the $4.68 five-year average price, which we would normally expect to match up with average storage levels,” he said. “If the surplus remains significant, we think we could eventually see prices drop to a significant discount to the long-term average price instead.”

On the upside, Evans said now that January has breached the failed support at $7.455, the next line of resistance would likely be seen at $7.695.

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