After beginning Monday’s trading by probing lower price levels down at $7.600, the March natural gas futures contract staged a surprise rally around noon EST, peaking at $7.990 before settling the day’s regular session at $7.869, up 12.9 cents from Friday’s close.

Traders and analysts were mostly perplexed by the rally, which was also seen in the crude futures arena. The general belief is that with storage levels comfortable, supply lines unblocked and a forecast for a warm February, natural gas futures prices would likely test lower price levels. Some industry insiders noted that a new shift in some February weather forecasts could have resulted in the gains on Monday.

“I can’t really explain the rally we saw on Monday,” said Tom Saal of Commercial Brokerage Corp. in Miami. “All that I heard was that one of the private forecasters had mentioned that the weather coming in was now going to be a little colder than first expected. I don’t know if that was the cause, but natural gas and crude oil rallied together.” March crude traded between $88.75/bbl and $90.70/bbl before settling the day at $90.02/bbl, up $1.06 from Friday.

Despite the unexpected jump in natural gas futures, Saal said he still sees the general trading range as $7.500 to $8.250. “Unless we get some really unexpected weather or some supply issues in a hurry, I can’t see us leaving that recent trading range,” he said.

Some risk managers are looking for lower prices. Mike DeVooght of DEVO Capital, a Colorado trading and risk management firm, on Monday morning counseled trading accounts to hold on to a short position established earlier in the April contract at $8, and says end-users should stand aside. Producers and physical market longs should “hold short [the remaining] winter 2007-2008 strip at $9 for 65% of production, hold short next summer [April through October strip] at $7.900 to $8 for a small position and hold short the summer strip at $8.250 to $8.350 for 50% of production.”

Weather bulls will have to contend with significantly warmer weather this week. AccuWeather.com forecasts a surge of warm air into key energy markets. “Significantly warmer air will flow into the Mid-Atlantic on Tuesday before spreading over the rest of the region on Tuesday night into Wednesday,” said AccuWeather.com’s Steve Penstone. The forecaster predicted that temperatures in the major cities along the East Coast Tuesday will be 20 to 30 degrees above normal for early February.

By Wednesday temperatures in Washington, DC should reach 63, well above the normal high of 44, and in New York City the normal high of 39 is expected to be eclipsed by Wednesday’s high of 58. In Boston temperatures are anticipated to reach 52 on Wednesday, 15 degrees above its seasonal high of 37, the forecaster said.

Traders Friday were kicking themselves for not selling. On Thursday March futures settled at $8.074 before plummeting 33.4 cents Friday to $7.740. “I wish I could have bet the house on that rally Thursday. It was all panic buying against crude, and crude [was down Friday],” said a New York floor trader.

“There was a lot of selling [in natural gas] up against the $8.110 area then, and currently we think it is the same trader who is continuing to sell it,” he said on Friday.

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