For the second time in three trading sessions, natural gas futures finished strongly Thursday after tumbling lower on profit-taking pressure earlier in the day. The market sunk lower at the closing bell Wednesday after traders learned there was no correction accompanying this week’s AGA storage report. Prices continued lower at the opening Thursday, fueled by a very bearish gap-lower opening on the daily chart. However, similar to Tuesday the sell-off lacked the intensity some traders expected, and as a result, short-covering entered the market to lift prices higher in the afternoon. April closed at $2.924, up 5.4 cents for the session.

Citing the return to above-normal temperatures following last week’s spat of arctic air across much of the nation, Ron Barone of UBS Warburg in New York believes the “brief winter hurrah” is over and looks for a price pull-back in the near-term. In addition to the chilly air, he includes a bevy of factors responsible for the price spike: increased storage withdrawals, declining storage surplus, higher competing fuels prices, early signs of a strengthening economy, growing evidence of declining deliverability, unabating reductions in rig activity, rising levels of planned nuclear outages, concerns of more nuclear shutdowns this summer tied to hardware failures, and short-covering.

“Though the [year-on-year storage surplus] is well-poised to decline further in the weeks ahead — and we’ll continue to monitor the balance of these important variables– we believe there is a good chance that futures prices will deteriorate beyond yesterday’s ‘sell-on-the-AGA-news’ correction as there remain several unanswered questions in the supply demand equation,” Barone wrote Thursday in a research note to his customers. Due to the uncertainty surrounding the speed of the much-ballyhooed economic recovery, the duration of the mild weather, the availability of western hydro and the forward-carry contango currently in the futures market, Barone may not be a market-bear but he’s wary of the near-term pricing environment at these levels.

Similarly, Tom Saal of Pioneer Futures in Miami is skeptical of the market’s ability to hold the current price level. Looking at Fibonacci retracement levels based on the recent rally, he points to $2.53 as a downside objective and implores his end-use customers to be ready for a correction down to the $2.50-60 level.

While the short-term outlook is sufficiently bearish because it calls for mild weather, the long-lead forecast could be very supportive because it calls for hot temperatures, traders agree. According the latest 30- and 90-day outlooks released yesterday by the National Weather Service, above normal temperatures are expected across much of the West and through parts of the Southeast through early summer. In fact, the April through June outlook calls for above-normal temperatures across a 12-state area extending from Washington state to Louisiana. Included in this area are the gas-reliant states of California, Arizona, and Texas.

Whether it was follow-through from the open-outcry gains or a reaction to the weather outlook, the market was moving higher in last night’s Access trading session. At 6 p.m., the April contract was up 6.1 additional cents at $2.985. Traders agree that Friday’s action could determine the market’s next price leg. The prompt contract has not finished the week above $3.00 since early November and many market-watcher feel that this would pave the way for more short-covering next week. On the other hand, a failure to break above recent highs in the $3.03-04 area would solidify that area as resistance, putting bears at the helm when the market re-opens Monday.

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