February natural gas futures surged Friday as seasonal buying, forecasts of cold weather, a lack of liquidity, and firm real-time dynamics combined to send prices sharply higher. February futures jumped 34.9 cents to $5.971 and March added 33.7 cents to $5.994. February crude oil added $1.74 to $46.34/bbl.

Short-term traders saw the rise as consistent with physical market players who establish long positions at the beginning of every month in order to hedge against rising prices. “I think both rallies [crude and natural gas] are a reaction to beginning-of-the-month (and maybe beginning-of-the-year) buying. I also think lack of liquidity from smaller players today is helping the rallies,” said a New York floor trader.

WSI Corp. of Andover, MA, predicted that major energy markets would shiver under below-normal temperatures. In its morning six- to 10-day forecast it said, “Colder-than-normal temperatures are forecast over the north-central U.S. and most of the eastern U.S.” Offsetting the eastern cold is a pattern of warmer-than-normal temperatures expected along the West Coast. “Anomalies are generally expected to average between two to seven degrees colder or warmer than normal,” it said.

The forecaster said confidence in the forecast was rated as average since weather models were in general agreement, yet risks to the forecast include even colder temperatures. “Temperatures may trend even colder over the eastern half of the country than currently forecast as all models advertise the PNA [Pacific North American pattern] will transition to a positive phase in early January.” It did add that the weather models “struggled” with how cold it would be in the East.

The PNA is a strong factor in the movement of the jet stream. The positive phase of the PNA pattern is associated with above-average temperatures over western Canada and the extreme western United States, and below-average temperatures across the south-central and southeastern U.S.

According to WSI, the high Jan. 9 in Boston is expected to reach just 29, well below its normal high of 37, and the high in Philadelphia is expected to be 33, seven degrees below normal. The high in Detroit is forecast to be 27, short of its seasonal norm of 32.

Tom Saal of Hencorp Becstone Futures in Miami, in his work with Market Profile, suggests that prices could advance as much as 30 cents. Market Profile identifies areas of “negative development,” which act as near-term price objectives. Saal said even with Friday’s hefty 34.9-cent advance, no areas of negative development had been reached. “The first big area of negative development above us is $6.10 to $6.30. What that means is that the market ought to trade in and around that area as it fills in the zone of negative development. Maybe next week,” he predicted.

“A lot of people are saying the cold weather is going to hang around for another couple of weeks before we get the warm-up. Before a lot of them [forecasters] were saying that December would be cold but January would be warm, but now they are pushing the warm weather out another two weeks.”

Saal added that he had received his first “Cap Flow” buy signal in a long time this week. Capital Flow, or “Cap Flow,” is a variant of Market Profile and attempts to categorize market activity in both a vertical (price) dimension and horizontal (time) dimension. By analyzing the relative components of vertical and horizontal market activity, Cap Flow can be used to forecast market direction, adherents contend.

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