Despite languid cash market prices and plentiful supply heading forward, natural gas futures exploded higher Friday as traders covered shorts and squared their books ahead of the four-day holiday weekend (some cash traders admitted having to work a half-day Monday, but the futures market will remain closed until 7 p.m. EST Christmas Day for Access trading and until 10 a.m. Wednesday for regular pit trading). By virtue of its 20.9-cent rally and $2.895 closing price, the January contract broke to new three-week highs Friday, and moved above the February contract for the first time since Nov. 2. Heavy trading activity punctuated the move, with 116,361 in estimated volume.

Financial “paper” trading started the rally in motion Friday morning as Henry Hub swing-swaps were offered 7 cents above Thursday’s $2.686 settlement. Prices at Nymex followed suit and the January contract gapped higher at its 10 a.m. EST open. After ebbing slightly during the noon hour, the buying picked up again in the afternoon Friday, as local traders gunned for buy stops waiting just above resistance in the mid $2.70s and low-$2.80s. Meanwhile cash prices, held down by weakened holiday weekend demand, were nearly immune to the strength in futures pricing. NGI‘s Henry Hub price for the weekend averaged $2.63, up just 4 cents from Thursday.

Although the coldest air thus far this season was invading much of the East Coast Friday, market watchers agreed it was the forecasts calling for even colder weather to come that were the root of the rally. According to the six- to 10-day forecast released Friday, an area covering roughly two-thirds of the nation, spanning from Maine to Florida, and all the way west past the Rockies, is expected to see below normal temperatures for the last five days of the year. The remaining area, including California, the Pacific Northwest, and parts of the Northern Plains states, can expect to see more seasonal mercury readings. Nowhere in the Lower 48 states are above-normal temperatures expected.

Also at work Friday was strength in the nearby petroleum complex in anticipation of OPEC’s meeting this week in Cairo, where production cut talks are expected. February crude lead the way, shuffling 34 cents higher to close at $19.62/bbl.

Looking ahead, many traders remain skeptical of last week’s late surge. “This is all just short-term weather-induced hype,” a mid-continent marketer said. “Sure it is cold [Friday] and it is expected to be cold into the New Year, but does that mean we should be trading $3.00 gas? I don’t think so.” Several natural gas brokers agreed and endorse selling rallies like the one experienced Friday. Resistance is seen at $3.02.

On the fundamental front, the market will undoubtedly take its first clue this week from updated forecasts available Wednesday morning. After that initial knee-jerk trading reaction has passed, the market will turn its sights to American Gas Association Storage data, which will be released Thursday at 2 p.m. EST to give the association an extra day to compile and crunch the data. Last week the AGA shocked the market lower when it announced that a meager 45 Bcf had been withdrawn from storage during the week ending Dec. 14.

Based on degree day forecasts for last week, Thomas Driscoll of New York-based Lehman Brothers looks for a 60 Bcf withdrawal Thursday. If realized, a draw down of that magnitude would be undeniably bearish as it would fall more than 100 Bcf short of last year’s 175 Bcf takeaway, thereby serving to expand the year-on-year surplus to more than 1,050 Bcf.

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