Natural gas futures bulls put Tuesday in the win column as the January contract shot up 44.3 cents to close at $5.737 on the news that January might not be as warm as many had previously expected. However, some traders weren’t ready to put bull’s horns on yet, chalking up Tuesday’s gains to short-covering by funds unless proven otherwise over the next few trading sessions.

The prompt-month contract methodically moved higher during the course of Tuesday’s regular session, putting in a high of $5.862 just before 1:45 p.m. EST. Tuesday’s trading marked a stark departure from Monday’s action, which saw a new low for the larger move established at $5.210.

“We saw a big drop-off in open interest on the recent sell-off. One would assume that is long liquidation,” said Ed Kennedy, a broker with Hencorp Becstone Futures LC in Miami. “As for the one-day rally Tuesday, it looks like some short-covering coming in from the funds. We’ll see more about that when we come back from Christmas.”

Navigating the holiday-filled week, Kennedy said he would classify the trading activity as “light to moderate,” but he noted that there is more volume than in previous years. “Sure, there are a lot of people out of the office for the various holidays, but with more and more electronic trading going on, people can get their business done from anywhere.”

Kennedy said the $5.210 low from Monday’s trading will likely hold up for a bit due to the changing weather outlook. “Most forecasters have moderated their forecasts somewhat from one calling for a near-term warm-up to one looking for more average temperatures. Some of the independents are actually using the ‘B word’ when referring to January now,” he said. “What was thought to be a warmer-than-normal January might now be below normal. Even if January turns out to be normal, that would be a heck of a lot colder than the month has been over the last three to four years. Coastal New York and New England might still be warmer than normal, but it won’t be anything to write home about. The credibility of the most recent forecasts is obviously much higher because it is becoming a shorter-term forecast. I think we are seeing some short-covering for that very reason, but everything could change in a heartbeat. As is the case with natural gas futures every year at this time, it is a question of ‘whether we get weather.'”

Despite the new low, some analysts said they thought the market’s recent balancing point was likely still intact. “The natural gas market is bobbing back to the upside in a demonstration that the break to new lows on Friday and Monday may not have fully broken the prior equilibrium,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “Forecasts for a warming trend may have prompted this downside reaction, but we note that the resulting temperatures may be warm compared with the 30-year norm, but may still be somewhat cooler than the five-year average. This creates the potential for storage withdrawals to continue beating the five-year average level for the next few weeks in a row, building some pressure for prices to pop back to the upside.”

Analysts suggest that the current regime of low prices has not been enough of a disincentive to slow production and hint at continued price weakness. According to Jim Ritterbusch of Ritterbusch and Associates, “The continued production strength has yet to be deterred appreciably by the low pricing environment. While this factor alone would not likely prove capable of pushing prices lower during the heavy usage winter period, it has become a very important variable when combined with declines in industrial usage due to the ongoing recession.”

Heading into the Energy Information Administration’s (EIA) natural gas storage report Wednesday at noon EST, which was moved up a day thanks to the Christmas holiday Thursday, most industry expectations appear to be looking for a withdrawal right around 135 Bcf to 145 Bcf for the week ended Dec. 19.

“The Wednesday noon DOE [Department of Energy] storage report could also give the market a lift, with a net withdrawal of 145 Bcf that would exceed the five-year average 132 Bcf, chipping away at the 114 Bcf year-on-five-year average surplus of Dec. 12,” said Evans.

A Reuters survey of 17 industry players produced a withdrawal range of 113 Bcf to 162 Bcf with an average pull expectation of 139 Bcf.

According to the EIA, last year’s similar week produced a 153 Bcf withdrawal.

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