Continuing to test its upper price limits due to the fact that cold has finally come to the East, January natural gas futures climbed higher Tuesday, settling near the day’s high.

After reaching the $7.35 high on the session just after noon (EST), the prompt month retreated before climbing once again to settle at $7.333, up 16.7 cents on the day.

“January natural gas did some work in negative ground [Tuesday], but has largely ratified the overnight gains, keeping the market in position to rival the failed support at $7.455 as the next resistance,” said Tim Evans of IFR Energy Services. “With the abundance of natural gas storage we see overhanging the market, we’d call the recent advance in price a simple relief rally, with the colder temperatures restoring some hope that the surplus inventory won’t have to be financed on through the 2005-2006 heating season. While perhaps worth celebrating, the overall heating demand this week is not really bullish in the sense of assuring a larger-than-average withdrawal once we get the corresponding DOE [Department of Energy] data.”

He noted that even as cold weather finally rolls into some areas of the country, one look at the natural gas storage data should still reveal that futures prices are high. “Not only is the storage surplus large when compared to past years, it’s the fact that the surplus is still growing,” he told NGI. “That sets up the next possible disappointment here because even with the colder temperatures in some parts of the country this week, the overall heating degree day accumulations may be even slightly below normal. So, you’re building hope into the price that we will have enough demand to at least make a dent in the storage surplus. However, the risk here is that if you don’t make a dent in the surplus now, the next little break in the cold that we see could traumatically cut prices.”

Evans said it is likely that come January, people will realize that there is still nearly 3 Tcf in storage. “With the 343 Bcf year-on-five-year surplus, we would have to burn through an extra 34 Bcf per week for 10 weeks in a row just to get back down to average,” he said. “At some stage, I believe people are going to be able to calculate this, and prices will come down. I would say that the big decline will come in January.”

Another thing Evans pointed to was the fund activity on the futures market. “If you look at the CFTC [Commodity Futures Trading Commission] data, we did collect a significant volume of fund shorts in the market,” he said. “We are trying to exploit their vulnerability to higher prices here and we are using the weather as a convenient lever to try to get them to budge. Whether or not that works remains to be seen.”

Looking towards Thursday morning’s Energy Information Administration (EIA) storage report for the week ended Dec. 10, Evans said the market may have to deal with a 70-80 Bcf draw that will add another 30-40 Bcf onto the 343 Bcf year-on-five-year-average surplus. “The failure to take that much back off the surplus will add to the market’s longer-term bearish woes in our view, with the impact to be compounded if we see any warming trends in the forecast,” he said.

Citigroup’s Kyle Cooper is calling for the report to reveal a draw between 68 Bcf and 58 Bcf. “This will obviously be a bearish report on an absolute while the temperature-adjusted analysis would be slightly bullish,” he said.

Pre-auction, the ICAP storage option auction based on the EIA report has set a preliminary level of a 60 Bcf withdrawal. The auction runs from 3 p.m. to 4 p.m. (EST) on Wednesday.

Thursday’s report goes up against some pretty hefty historical data. Last year revealed a 134 Bcf draw, while the five-year average pull for the week was 111 Bcf.

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