After encountering support just above the important $10.650 level in morning trade, January natural gas futures rallied higher in the afternoon, before expiring at $11.431, up 40.9 cents for the day. The $10.650 level marks the top of the Hurricane Katrina gap on the perpetual chart.

The expiring prompt month traded within a $1 range from $10.720 to $11.700. Trading on Wednesday put an end to January’s three-day decline, which had shaved $3.249 off of the contract.

February natural gas, which has now taken over prompt month honors, settled 42.1 cents higher Wednesday at $11.637.

“I think some of Wednesday’s rally could really be attributed to last day expiration issues,” said Brad Florer, a broker with ICAP Energy. “You’ve got guys coming in who are short and they have to cover in the pits, so there is a little bit of a squeeze situation. You also have to look at influence from crude futures, which settled substantially higher Wednesday on fears that OPEC is going to cut production.” February crude on Wednesday ended up settling $1.66 higher at $59.82/bbl.

On top of that, Florer said that a market such as natural gas futures that is off more than $4 in the last two-and-a-half weeks needs to bounce at some point.

“I think all of these factors combined to give gas a bounce Wednesday, but I don’t think it will put a dent in the overall gravity of this recent pullback,” he said. “I think the bulls are really going to have to put something together if they are going to regain some momentum. This was just a short-covering bounce. It would have to be a lot stronger of a bounce in order to mark a directional change.”

The broker also pointed out that with the year winding down, moves this week shouldn’t be read too carefully. “I don’t know if you put much stock into what happens this week,” he said. “We’ll get everyone back in to work at the beginning of the year and see where they take it from there.”

While Florer acknowledged that the $10.650 level from the Hurricane Katrina gap is significant, he believes $10 is even more important. “I think overall you need to look at $10 as a clear target because it was the top of the whole psychological spike for so long. If we had a spike, we knew it was going to go to $10.10 and turn around.”

Market technicians and followers of seasonal price cycles suggest that the decline has much further to go. “Since the massive reversal lower from the (Dec.13) $15.780 high, we have cited $8.680 as the objective of an average seasonal decline,” said Walter Zimmerman of United Energy.

What bears find most intriguing is the fact that seasonal analysts such as Zimmerman point to their observation that December 2005 represents the “epicenter of the peaking window of the 2.5 and 4.0 year (price) cycles (and) if any year in the history of natural gas is capable of falling further than a seasonal average decline, one would think that it would be this year.”

With January’s expiration firmly in the rearview mirror, the attention of traders will now focus on the Energy Information Administration’s (EIA) natural gas storage report for the week ended Dec. 23.

Most industry withdrawal estimates appear to be focusing on the 154-165 Bcf range, although some are calling for a withdrawal as small as 125 Bcf or as big as 185 Bcf. Wednesday afternoon’s ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, predicted a 165 Bcf withdrawal for the week. Bentek Energy’s forecast, which relies on actual storage flow data on the nation’s pipelines, calls for a 167 Bcf withdrawal, including 108 Bcf in the East, 43 Bcf in the Producing region and 16 Bcf in the West. A 167 Bcf withdrawal would leave 2,635 Bcf of working gas in storage compared to an average of 2,607 Bcf over the last five years, Bentek said.

The number revealed Thursday will compare with last year’s 170 Bcf withdrawal and the five-year average withdrawal of 131 Bcf.

The market will receive an abundance of news Thursday morning. In addition to the natural gas storage report release, the weekly petroleum inventory reports will also be released at 10:30 a.m EST.

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