Bulls staged a surprising 9.4% rally in March futures to a high on Friday of $2.21 from Wednesday’s low of $2.02. March ended Friday up 4.1 cents to $2.191, slightly off its daily high and 2.6 cents from its $2.165 low, leaving many observers on the edges of their seats wondering if the large number of speculative shorts would reconsider their exposure and propel the market into the $2.20s and possibly $2.30s.

“It’s an interesting mix because we can see a high level of speculative short vulnerability here,” said Tim Evans of IFR Pegasus. “That’s the single significant bullish factor in the market. What’s surprising about this week’s rally is we’ve really been able to put pressure on those shorts without any significant fundamental excuse for doing it. The AGA withdrawal of 82 Bcf was a pretty pitiful number. Inventories are still way high.”

The real story is that there are too many people who are too short at the moment. Evans noted that the exchange and many corporations have restrictions on how long a large number of positions can be held. At what point will they reduce their exposure. There also are a large number of commercials who are long on the other side of the market.

“Somebody is going to blink,” said a marketer. “Who’s it going to be? I think it would be unusual if all the buying and all the selling remains evenly balanced and calm for the rest of the month.”

Evans said he’s expecting a further short-covering rally to push March into the $2.30s, maybe even to $2.40, followed by a large drop, leaving March below $2 at expiration. “We’ve been through this drill before,” he said. “We could be more confident of this drill if there were still an Enron, somebody who could really move the market, game it up and then let it go.”

Some might make the case that the recent relative tranquility in the market is due to the absence of Enron, but it’s also a function of low price levels and high storage stocks. For the market to go higher, bulls have a very heavy weight to push up. On the other side, it’s been hard to bang prices down too far because all of the selling already is in the market.

On Friday, March futures broke through resistance in the $2.18-195 area, around the previous highs from Jan. 31. Now everyone is waiting for a reaction. The question is will there be enough follow-through to the upside to confirm that it’s a legitimate break-out, or will it end up being just a fake-out.

“If there’s a higher high in Monday’s open outcry trade, people might say, ‘I don’t know why its up and don’t necessarily agree with it being up, but I have to react and respect the strength I’m seeing in the market,'” said the marketer. “Sometimes the very lack of definite bullish fundamentals in the market makes a rally a little bit scarier because you get the panic in the market. In the short run, markets can go anywhere they want. March could run to $2.40 for no good reason. Can it stay there? Not without an Alberta Clipper or a Nor’easter. You need some severe weather to really put some fundamental teeth in the rally.”

The National Weather Service’s six- to 10-day forecast is calling for above normal temperatures throughout the entire eastern two-thirds of the nation with the only below normal temperatures confined over parts of California, Nevada, Arizona and Utah. But it’s not that unusual to go home on Friday thinking warmer than normal weather is in the forecast, only to walk in Monday morning and find out it’s going to be something different.

“We’re at a place where we really miss Enron because those guys were more impatient with the market; they wouldn’t let it just let it sit here,” Evans added. “It would be either at $2.28 right now or they would have gotten it to $2.21 and then slapped it down to $2.10.

“I think we’re going back to a period in the futures market more like the mid-90s, when 50 cents was a two-month rally and not a one-day range. I think there will be enough inventory overhang from this season into the next heating season to preclude large swings and real sharp rallies.”

Thomas Driscoll of Lehman Brothers said he’s forecasting AGA will report a withdrawal of 140 Bcf next Wednesday. During the same week last year, AGA reported a 95 Bcf withdrawal and the five-year average is 110 Bcf. Driscoll said his bet is based on estimated heating degree days of 208 versus 180 last year and 215 normally. A 140 Bcf withdrawal would leave 2,072 Bcf of working gas in storage, or 1,031 Bcf more than at the same time last year and 695 Bcf more than the five-year average. Evans said he is expecting a 120-130 Bcf withdrawal.

If March decides to tumble, support is expected in the $2.08-2.12 range, ahead of Wednesday’s $2.02 low and the $1.96 bottom on Jan. 28.

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