Stemming a two-day, 22-cent price erosion, natural gas futures turned modestly higher in an abbreviated pre-holiday weekend session Friday, as profit taking gave way to a steady stream of end-user buying. The March contract looked poised to hit the $2.12 low notched last Monday, but after sellers ran out of gas early Friday the way was paved for a positive close. At 1 p.m. Friday the March contract settled 2 cents higher for the day and 1.5 cents higher for the week at $2.206.

Many market watchers remained somewhat ambivalent about the market following Friday’s quiet activity. The market made a lower high and lower low on the day, but closed higher, confounding intra-day technical observers. Adding to the uncertainty, the March contract finished the week between its 18-day and 40-day moving average at $2.142 and $2.30 respectively. Technicians tend to buy the market when it moves above these averages and sell the market as it moves below them.

Calling it a “‘tweener day,” Tom Saal of Pioneer Futures in Miami was hesitant to bet too heavily on a move higher or lower. “The tea leaves are pointing in both directions. If the market moves higher you have to buy into it; if it moves lower, sell it.” And while that may seem to be an oversimplified trading strategy, the wait-and-see approach might be the best defense considering the nebulous fundamental factors at work.

For example, at 2,056 Bcf, storage is nearly double where it was at this time last year. But does that necessarily mean that gas prices will fall in the near term? Maybe not, answered Saal, who believes that because of the large forward carry premium (currently about 79 cents between May ’02 and Jan ’03) there remains an economic disincentive to withdraw gas from the ground right now. “This fortifies the physical price right now, but sets the market up for a bigger fall once the injection season begins in April.”

However, the question of whether prices will fall during the summer months is a difficult one. For starters, natural gas fundamentals morph from one-dimensional in the winter to multidimensional in summer. “That makes it harder to predict the price direction in summer,” Saal continued. “You have so many more variables: heat, drought, nuclear output, hurricanes. In the winter it is just cold weather, or lack thereof, that moves the market.”

“The natural gas market is balanced on a knife’s edge here,” adds Tim Evans of New York-based IFR Pegasus. “It may only take a small push to create a larger move. The question is whether there is any chance to stampede the bears into a fresh bout of short covering, or whether the fundamentals are simply too weak.” That being said, Evans favors the downside, but is protecting his $2.18 short position with a tightly placed $2.26 buy stop.

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