After spending precious little time in the $1.80s Monday, February natural gas futures bubbled higher on expiration day yesterday as a late round of local short-covering boosted prices back above the $2.00 mark. By virtue of its 9.8-cent gain and $2.006 final settlement price, the February contract managed to avoid last October’s fate of a sub-$2.00 closing price. Volume was normal for an expiration day with 129,016 contracts changing hands.

Despite overwhelmingly bearish fundamentals, traders were not surprised by the market’s ability to post gains at the close Tuesday. After all, the February contract had tumbled precipitously throughout its tenure as prompt month, losing 27% of its value, or 70 cents, to rest at Monday’s close of $1.908. A short-covering rally was imminent. The only question still to be answered was whether it would take place before or after the February contract limped off the board.

Local traders at Nymex yesterday bet that it would be “after” and positioned themselves on the short side of the market Tuesday. When cash prices made only a modest attempt to move lower in convergence, the futures market was left to make up the difference. As February moved higher, locals were forced to cover their shorts, pressuring prices higher all the while. NGI’s Henry Hub cash price averaged $1.98 Tuesday, down four for on the day and just beneath February’s final mark.

Looking ahead, traders are mixed as to whether the market will feed off of February’s strength and post a second straight advance or retrace lower Wednesday. While the body of both technical and fundamental evidence points to more weakness in the intermediate term, market-watchers are unsure if the rally has completely run its course in the short run.

However, as is often the case on Wednesday, the market will likely wait until after the release of fresh fundamental data before making its move. Estimates ahead of that release call for net withdrawal of about 100 Bcf, which would fall easily below last year’s draw of 128 Bcf. Further out on the horizon, analysts look for this trend to continue. Thomas Driscoll of New York’s Lehman Brothers calls for a 95-100 Bcf withdrawal next Wednesday, which will fall short of the 105 Bcf year-ago comparison. Tim Evans of IFR Pegasus in New York agrees, adding that a withdrawal next week of 110-120 Bcf would fall short of the typical “January thaw rate,” leaving storage supplies at a level that does not rule out the risk of inventory dumping.

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