January natural gas futures rose Wednesday as traders looked for short-covering needed for year-end bookkeeping to keep prices firm in the near term. Longer-term traders, however, suggest that with confirmation of a mild latter half of December, traders currently undecided could enter the market vigorously on the short side. At the close of trading the January contract rose 3.8 cents to $7.179 and the February contract added 2.1 cents to $7.299.

“We got a nice little bounce today. We are coming down to year-end and traders with gains on their short positions are looking to cover. I think there is room to move higher,” said a New York floor trader. He anticipated buying of the January and selling of the February contract going forward.

“I think up at $7.420 to $7.500 there are some big (buy) stop loss orders, and although we are a ways away from that, tomorrow’s inventory report could be the ticket to drive the market higher and activate some of those stops,” he said.

Current estimates of Thursday’s 10:30 a.m. release of inventory figures put the withdrawal in the low 130 Bcf range. A Reuters survey of 21 analysts revealed a median estimate of 132 Bcf. A Bloomberg poll put the withdrawal at 134 Bcf. Those figures will be compared to last year’s 85 Bcf pull and the five-year average withdrawal of 128 Bcf.

Big draw or little draw, once late-December weather gets clarified prices may be poised to take a tumble. “Futures markets are supposed to be anticipatory, but in the natural gas market there is further downside potential,” said Eric Wittenauer, an analyst with AG Edwards in St. Louis. He added that there were “people on the sidelines” waiting to see if forecasts for late December cold materialize. “With each day that passes without cold temperatures and significant withdrawals you add to the bearish sentiment and prices could go lower still.”

Proponents of efficient markets would argue that the current market price is a consensus of all available information and forecasts calling for a mild second half of December are fully priced in. Wittenauer isn’t so sure. “I wouldn’t say that the forecasts of a warm second half of December have been fully discounted. There are traders on the sidelines waiting to see and better gauge what things will look like. If you are on the sidelines waiting to see if those forecasts are correct, you are likely to be on the bearish side of the market.”

Weather bears have been counting on a warm finish to December to drive a stake through the heart of the bullish case. The MDA EarthSat six- to 10-day forecast ending Dec. 28 confirms that scenario but leaves room for interpretation. “A potent cold front starts off the forecast here as it exits the East Coast, sweeping cooler weather across the eastern and southern states. This push of cooler weather is not expected to last long, as even the European ensembles (which show the cold lingering the longest) are quickly exiting it by day eight,” said Matt Rogers, MDA EarthSat meteorologist. He cautioned, however, that the end of the forecast period ends with “a little more disagreement between the two main model suites.”

“There is downside risk in the market, and inventories as they stand can impede any upside movement in the near term,” said Wittenauer. He added that the market has been in a tight range between $6.50 and $7.50 and at this time of year the market is really a heating market. Wittenauer’s estimate for tomorrow’s withdrawal is 125 Bcf.

Inventories are key, according to Wittenauer. Record season-ending stocks are in the mix and “prices could be pressured, further sending natural gas futures below the $7 level. Although weather forecasts don’t suggest it, Wittenauer said some strong withdrawals could move the market back to an $8 handle. “It would be easy to do,” he said.

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