In reaction to the arrival of the much-anticipated blast of cold air in the eastern half of the country, natural gas futures rocketed higher Wednesday as early short-covering by funds and commercials triggered waves of buy-stop-loss orders. By virtue of its $5.50 high trade, February notched a new all-time contract top and traded within 3 cents of the 21-month prompt-month high made by the January contract on Dec. 13. It closed at $5.43, up 32.3 cents for the session.

Although some traders looked for a rebound Wednesday following Tuesday’s price erosion, few expected the market to rebound as much as it did. Physical prices that traded Wednesday morning for Thursday flow did not participate in the futures rally, with slight declines in the production area and larger slides in the Northeast. However, it is relatively safe to expect that cash prices will rally Thursday.

In addition to the urgency to follow the futures market higher, the cash market also will receive a boost from the potential for freeze-offs in the production area. Contributing to the strength Wednesday was the notice put out Tennessee Gas Pipeline about the possibility for well freeze-offs.

“Looks like the market bought the rumor and then bought the event,” said Ed Kennedy of Commercial Brokerage Corp. in Miami in reference to the below-normal weather that arrived to the eastern United States Wednesday. “Usually, you see the market sell off when the weather arrives, but in this case the actual temperatures are coming out colder than the forecasts suggested.

“Another factor that came into play as the rally persisted Wednesday was options-related futures buying,” said Kennedy. “There is more than 5,500 in open interest in $5.50 calls and you can bet that the locals were gunning for that level…. You may see more of it [Thursday]. I would look for an early test of $5.50,” he predicted.

Because a break to new 21-month highs could elicit another wave of buying, Kennedy recommends that end-users might want to take a look at options now. At about 58%, implied volatility is reasonable for this time of year and that makes options an attractive hedging tool. That being said, Kennedy suggests a February options fence, which would involve the simultaneous purchase of a $5.55 call (21 cents) and sale of a $5.00 put (10 cents). The net position, which would cost 11 cents, would create a fence around the current price level. This would give the buyer the option to buy February futures at $5.55 should prices continue higher. However, if it goes lower and the put is exercised, the end-user would pay $5.00 for his February supply.

Looking ahead to fresh storage data to be released Thursday, the market calls for a withdrawal in the 98-110 Bcf area. If realized, a pull in that range would be bearish as it would fall short of the five-year average of 119 Bcf, as well as the year-ago draw of 142 Bcf. However, don’t bet on a bearish number necessarily leading immediately to lower prices. Last week the market tacked on a 14-cent advance after learning that a paltry 86 Bcf was pulled from the ground during the week ending Jan. 3.

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