After checking higher to notch a new, 16-month high for the second straight session, natural gas futures shuffled lower in two distinct surges of commercial selling Tuesday afternoon. At $4.247, the November contract closed nearly a dime off its $4.34 high and 5.6 cents lower for the session.

The coldest air yet this season dropped mercury levels below the freezing mark across much of the northern half of the country Tuesday morning and natural gas cash prices reacted by moving higher. Even better were the gains in the Northeast, led by Transco Z6-NY and Tetco M-3 which both advanced 8 cents. Looking ahead, weather-watchers look for more of the same.

According to the latest six- to 10-day weather forecasts released Tuesday by the National Weather Service, below normal temperatures are expected to hover over the eastern two-thirds of the country through at least Oct. 25. However, bears looking for a ray of hope yesterday were quick to point to the emergence of normal temperature forecasts for the western third of the country for the same time period. Their hope of course, is that the milder temperatures will gradually move to the East, reducing the demand for gas by the time bidweek rolls around.

For Thomas Riley, Vice President of Gas Marketing for West Virginia-based Petroleum Development Corp., the weather this fall and early winter will dictate the price direction. “We had highs only in the 50s [Tuesday] and that means people are burning gas all day. A lot is said right now about storage, but it is not going to matter whether we reach full [storage] capacity on Oct. 20 or Nov. 4. The reality is that we will reach full capacity before the withdrawal season begins.”

Because nothing is as uncertain as the weather, PDC’s winter hedging program was tailor-made to protect against the downside that mild winter weather would bring, while not too severely hampering the upside potential. “We believe that the weather in the next 60 to 90 days could have a dramatic impact on natural gas prices over the next year,” added PDC President Steven Williams. “With storage at record high levels, warm conditions this fall and in the early winter could undercut natural gas prices. On the other hand, normal or cold conditions could expose declining domestic natural gas production and result in insufficient supplies to meet the demand,” he reasoned.

Specifically, in the Appalachian-Michigan basins, PDC has hedged its production by purchasing Nymex put options in the $3.40 to $3.80 area using profits from the sales of $3.75 to $4.35 call options. “By using options we have been able to protect against about two-thirds of significant price declines while retaining two thirds of the upside potential of our large price increases. If the actually prices are between the strike prices of the puts and calls, they will have no impact on our results,” Williams said.

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