While the Northeast continued to bask in spring-like 60- to 70-degree temperatures in January for a second consecutive session, natural gas futures traders inexplicably continued to pressure upside resistance at $8. The February contract touched that level briefly before finishing out Tuesday at $7.967, up 8.8 cents from Monday’s finish.

“Psychological resistance resides at $8 and I think we definitely confirmed that on Tuesday,” said Tom Saal of Commercial Brokerage Corp. in Miami. “I continue to stick by what I have said for a while here. The single most bullish factor in this market is that the funds are net short over 100,000 positions. Sooner or later, they are going to want to take some profits on their short positions, which would cause a short-term rally. Depending on the amount of short-covering, that rally could be of pretty sizeable proportions.”

Analyzing activity for natural gas futures over the past few years, Saal said it would appear that the current price level up near $8 is somewhat inflated. “Last year’s winter and this winter so far have been characterized as not being average. Last winter we ended the season with a lot of gas still in storage and I expect that will occur again this year,” he said. “Last winter, the average price from November 2006 to March 2007 was $7.155. This winter so far — with November, December and early January — the average price is $7.212. It looks like even with a lot of gas in the ground and fairly mild weather, the market wants to gravitate to right around $7. Here we find ourselves venturing 75 cents to $1 above ‘fair value’ as a result of short-covering by the funds.”

As to when this newest round of short-covering might come to an end, Saal said it is hard to tell. “You might think that the end of the covering might be right around the corner, but because the funds are so massively net short, they could decide to increase their covering and this thing would gain more momentum to the upside. On the other side, the commercial hedgers are net long, so they might be wanting to sell the positions up here around $8. So there are definitely conflicting powers at work here. My take is that I would probably start to sell north of $8. Without any serious weather, the market is likely to gravitate back to the $7 to $7.250 area.”

Others said weather forecasts moving forward remain key. “This market appears to be discounting another significant cold spell beginning later this week, and although deviations from normal don’t appear substantial and an Arctic event is not likely, the futures could be suggesting a sustained period of below-normal temperatures,” said Jim Ritterbusch of Ritterbusch and Associates.

Cold spell? For the moment the Midwest and East are basking in relative warmth. AccuWeather forecasts Tuesday morning called for Chicago to see a high of 56 with Philadelphia expected to “roast” under a 68-degree high. Later in the week Chicago is forecast to see a high of 37 Friday, and only by next Monday are temperatures anticipated to fall to a seasonal 31. Philadelphia’s high Friday is forecast at 53, and that is expected to drop to 42 by Monday. The normal high this time of year in the City of Brotherly Love is 39, the forecaster said.

Ritterbusch also sees funds and managed accounts at work. “We would also continue to emphasize that the funds had become heavily positioned on the short side of the gas futures, especially within the options market. As a consequence, an apparent recent tendency of buying the futures to protect bearish option strategies could be sustained near term,” he said in a note to clients.

Other traders are following the recent trend higher. “We’re long February natural gas from approximately $7.290 with a stop loss order at $7.700,” said Phil Flynn of Alaron.

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