After a lower opening failed to attract follow-through selling,natural gas futures rallied Friday as traders covered shorts aheadof the weekend. The December contract notched its low for the dayat $2.755 in the first hour of trading before bubbling higher tofinish at $2.884, a 5.8-cent advance on the day. Estimated volumewas above-average, with 80,226 contracts changing hands.

For the second day in a row, traders were stumped by themarket’s direction. “We get a bullish storage report and the marketfalls off. Then we get a lower opening and the market picks rightback up. Doesn’t make much sense,” a Chicago trader lamented.

Tom Saal of Miami-based Pioneer Futures, on the other hand, wasquick to point to open interest as a key indicator for this market,both past and present. Open interest has been steadily falling eversince the expiration of the November contract and that, insistsSaal, is a result of long liquidation. “Once those longs had exitedtheir positions, the market was left with an imbalance of shorts.Then when those shorts came out to cover on Friday, there was noselling left to soak it up.” And in addition to the price advance,Friday’s buying pressure was responsible for a “classic reversalpattern” on the daily charts. “We opened lower, made a fresh low,and then settled above the previous two settlements,” he continued.

Looking ahead, Saal believes confirmation of the move higher nowneeds to come from open interest. “When you see 2 or 3 days in arow of increasing open interest, then you know the market ispicking a direction. Winter is still not over and I would expecttraders will add to their long positions from here.”

Brent Caperton of Houston-based Adams Resources Marketing echoedthat sentiment. “This market is still a pure weather play, and whatit needs is a steady flow of below-normal temperatures acrossdensely populated areas of the country.”

According to the National Weather Service (NWS), that may not betoo far off. In their latest six- to 10-day forecast releasedFriday, the NWS calls for below-normal temperatures to invade theentire East Coast from northern Maine straight down and moving intoextreme East Texas by later this week.

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