Rebounding from Thursday’s price free-fall, natural gas futures turned higher Friday as traders bought back their shorts on the idea that governmental weather forecasts calling for mild temperatures through the remainder of the winter may be inaccurate.

Although it waned slightly during the middle of the session, buying was strong at Friday’s open and close. January finished at $5.183, up 13.6 cents for the session, but down 10.1 cents for the week. February and March moved higher in lockstep with the prompt contract, boosting the winter strip 13.3 cents to $5.129. At 77,649, estimated volume was light and proves the market’s tentative trading posture.

After watching the market whipsaw in a volatile 45-cent trading range Thursday, traders were reticent to throw their hats back into the ring ahead of the weekend Friday. Also of concern, market watchers agree, were the conflicting weather forecasts out there for the end of December through January. While the National Oceanic and Atmospheric Administration calls for very mild winter temperatures north of a line drawn from Southern California to New Jersey, private weather forecasters — who have more discretion on which forecasting model they use — look for continued normal and below normal mercury readings (see related story this issue).

For Ed Kennedy of Commercial Brokerage Corp. in Miami, the market is at a pivotal point. “The inability of the January contract to move back above February is certainly a bearish indicator. This market feels like it has at least one more down leg left in it, and a break of $5.00 could mean a further correction down to the $4.70 area.”

However, Kennedy is quick to qualify that statement and believes the $5.00 could just as easily hold as support, especially if the market receives another round of supportive weather outlooks. “The problem right now is that there is so much disagreement among the various long-term forecasts. Until there is consensus, the market will react to any change in the short to intermediate-term outlook,” he reasoned.

A Washington, DC-based broker agreed that the futures market rests at a critical juncture. “There is a flag or pennant formation on the daily chart, which could be bullish for prices. A break above $5.53 would confirm the pattern and could lead to much higher levels. Alternatively, a break below $5.00 could signal that a top is in place. This remains a buy-the-dips market. Bulls are in control, but maybe not for much longer,” she said.

According to the latest Commitments of Traders Report issued Friday by the Commodity Futures Trading Commission, non-commercial traders extended their net long holdings by 1,501 positions to 13,083 during the week ending Dec. 17. What is interesting about their behavior is that after extending their longs by 6,000 and boosting the market 40 cents the week prior, non-commercial traders only needed to add 1,501 positions to boost the market roughly 60 cents from Dec. 10 to Dec. 17.

Because these non-commercial traders have had a pretty good track record for buying on strength and selling into weakness, they have become a good barometer for the direction of prices. As they are accumulating longs, the market is usually headed higher. When they are short, the market is probably moving lower. The fact that they only added 1,501 of length tells us one of two things. Either they are not willing to bulk up too heavily on natural gas positions ahead of the end of their accounting cycle on Dec. 31, or they are already near their threshold for this move.

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