Buoyed by crude oil and by falling mercury readings in the Northeast, natural gas futures rebounded sharply Tuesday morning as fund traders added to their long positions. However, the day’s advance was tempered slightly when afternoon as light selling entered the fray and deposited the prompt contract back below the psychologically important $6.00 mark. By virtue of its 12.5-cent advance and $5.977 close, the March contract remains in bulls hands. At 99,244 estimated volume was heavy and served to punctuate the price advance.

Although some suggest there is no real correlation between crude oil and natural gas prices because of the somewhat limited amount of fuel switching, there were plenty of folks pointing to that relationship as a factor yesterday’s price rise. Crude oil jumped to a new 26-month prompt month top Tuesday following the Iraqi refusal to accept the Franco-German proposal to use UN peace-keeping forces as arms inspectors. At $35.44, March crude finished 2.8% stronger or 96 cents higher for the session.

Physical gas prices were also a supportive factor, traders agreed. Bitterly cold air is expected to move back across the eastern half of the nation Wednesday night and northeast utilities were seen as aggressive buyers ahead of the cold front. Prices for New York-area deliveries topped the $10 mark and New England-supply crested above $13.

Looking ahead, market watchers note that weather forecasts for the latter part of next week show moderating temperatures, which could induce a sell-off later in the week. While the six- to 10-day forecast still calls for below-normal temperatures, the eight- to 14-day outlook points to normal and above-normal temperatures in the East.

And while bearish weather in the forecast is usually enough to spawn some long liquidation, it is possible that sellers are waiting until after the storage data is released. Expectations ahead of that report are wide-ranging, with Tim Evans of New York-based IFR Pegasus looking for another 200-220 Bcf draw and Thomas Driscoll of Lehman Brothers calling for a modest 135 Bcf takeaway. In the middle is Kyle Cooper of Salomon Smith Barney who predicts a 150-160 Bcf draw, which will would fall between the five-year average draw of 113 Bcf and the year-ago figure of 172 Bcf.

Although the March contract remains above its short-term uptrend line, its intermediate-term uptrend line, and its 40-day moving average, it wobbled a little Tuesday by notching a lower low on the daily chart. That, combined with waning price momentum and bearish divergence on the charts should start to wear down the uptrend, says Tom Saal of Commercial Brokerage Corp. in Miami.

However for Evans, the market’s recent $5.795-$6.111 range still favors the bulls. “A breakout to the upside will have us looking for projected resistance first at $6.20-25 and then $6.60-65…. A break to the downside, in contrast, would encounter support from $5.60 to $5.565 low from Feb. 5 as an increasingly important pivot,” he wrote in a note to customers Tuesday.

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