Feeding off late gains achieved Thursday, natural gas futuresrumbled higher Friday as traders continued to look past theoverwhelmingly bearish short- and medium-term weather outlook tofocus instead on the potential for higher prices this summer. Withthat upward bias, the March contract advanced 5.4 cents to settleat $2.603, just a fraction of a cent below the $2.61 Februarysettle, but nearly a dollar above the $1.666 March 1999 closingprice.

“Apprehensive,” was one trader’s way to describe trader’smovements late last week. “If it weren’t for this weather, we wouldbe at $3.00 right now.”

Another source was quick to point to cash prices, which by notslumping in their usual weekend fashion, gave the futures marketthe green light to move higher. However, some wonder just how longcash prices will be able to hold at these levels considering theextent of the warm-up expected to continue this week.

According to Fred Gesser of Omaha-based Strategic WeatherServices, the above normal temperatures much of the nationexperienced last week is expected to continue through the firsthalf of March. “Aside from a few minor breaks here and there, theeastern half of the nation can expect temperatures to rangeanywhere between 3 and 20 degrees above normal.” Among otherthings, his forecast is a result of relatively cool sea surfacetemperatures in the East Pacific which are responsible for heavyrains across parts of California.

However, for Tom Saal of Miami-based Pioneer Futures, theweather forecasts are only one piece in the puzzle. Moreover, he isconcerned with the current level of the summer and winter spreadsand their effect on not only storage arbitrage, but also spreadtrading. “If you average the seven summer months and the fivewinter months, you will find that there exists only a 21-centspread right now. That spread is well below the average summer towinter cost of [storage] carry, which can range from 40 to 50cents.” To put it simply, Saal believes that the disequilibrium incurrent summer and winter prices will make it difficult fordiscretionary storage players to inject gas this summer and hedgeit against the winter. But like any good economist, Saal has aself-correcting mechanism that will put the market back in line.”The spreads are coming. Last year they came in and compressed thesummer-winter spread by buying the summer and selling the winter.This time it will be the opposite — selling the summer and buyingthe winter — to drive up the spread.”

And according to the latest Commitment of Traders reportreleased Friday by the Commodity Futures Trading Commission, it isclear that the spreads still have a way to go. Their current openinterest of 17,012 lines up with their level from a year ago of17,563, but “look out,” warns Saal, because by August of last yearthat level had peaked at more than 52,000 in open interest.

And while he admits that the summer and winter spread can remaintight in a bull market, he feels the front months could be in storefor a little bit of downward correction in the weeks to come.

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