Stemming the selling pressure set in motion by Wednesday’s storage report, the natural gas futures market rebounded mid-morning Thursday as traders contemplated a supply-demand balance that may be tighter than previously thought. In a rare twist, the 12-month strip gained more (9.5 cents) than either the winter strip (9 cents) or the prompt month (6.8 cents). November closed at $2.486, just off its daily high at $2.51.

For one veteran trader, volatility this week in both the cash and futures markets is a symptom of a tighter supply-demand balance than many market-watchers thought existed. “One thing that people fail to realize is the amount of demand that as returned to this market as a result of lower prices. I have heard estimates that put returning fertilizer production demand at 5-6 Bcf a day. That tightens the market and puts more emphasis on the weather. We have seen that in the market this week. Cold air prompted a cash-led rally on Tuesday only to have prices come right back off when the temperatures began to moderate Wednesday. Now people fear that the weekend will feature a big sell-off as the warm-up continues.”

Fertilizer and ammonia producers are returning to the market in droves because of lower gas prices (see Daily GPI, Oct. 15). An ammonia industry expert at Duke Energy said there has been a 20% increase in ammonia production (222,000 tons of ammonia) since August, representing about 7.6 Bcf of total gas demand.

Looking ahead, the market will have some tough choices Friday morning. Technically the picture is mixed and that will prompt traders to look at the fundamental outlook, which is also open to interpretation. Cash prices could set the tone by probing lower as demand abates for this weekend’s expected mild weather. However, traders could just as easily boost prices in reaction to the National Oceanic and Atmospheric Administration’s latest 90-day weather report released yesterday afternoon. Following the bullish Salomon Smith Barney winter weather outlook released Monday, NOAA added its own cold winter forecast yesterday, calling for a repeat of last winter’s heavy Midwest and Northeast snow and cold air in the South (see related story this issue).

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