In a compelling show of proof that it is truly a weather-driven market in winter, natural gas futures gapped higher and shot to new two-week highs Monday as traders returned from the weekend to learn that the rest of November would feature below-normal temperatures for the eastern half of the nation. The December contract finished at $4.263, up 28.2 cents for the session and just off its $4.28 high.

A quick look at updated six- to 10-day and eight- to 14-day forecasts released Monday by the National Weather Service reveals a dramatic change in the weather for the remainder of November. Gone are the large swaths of red denoting above-normal temperatures that have dominated the intermediate-term forecast maps since the end of October. Instead, these revised outlooks call for below-normal temperatures across the eastern half of the country through Dec. 1. In the west, normal mercury readings are expected and will mark a departure from the mild weather experienced across much of that area of the country thus far in November.

“Buy the rumor and sell the fact,” was the advice of Tom Saal of Commercial Brokerage Corp. issued when asked how to take advantage of the forecasts. “You should see a sell-off [Tuesday]. Weak shorts and locals were responsible for the run-up. Now what you have is weak length initiated by Johnny-come-latelys who bought it on the run-up with hopes they will see $4.42 or $4.60…Because it closed near its high, I would expect a little bump higher in overnight Access trading, but when it becomes apparent that [higher levels] are not in the cards, this thing will come right back off,” he reasoned.

However, overbought conditions are not the only thing weighing on the market, Saal continued. Also of bearish impact is the huge forward carry premium that currently exists. “With Henry Hub cash prices averaging in the upper teens Monday and futures closing in the mid-$4.20s, you have a huge incentive to buy spot gas, inject it into the ground and sell prompt month futures. As long as your carrying costs are less than the [cash futures] differential, you can pocket the difference.

Another factor that helped boost gas prices Monday was strength in the nearby crude oil pit. Although inspections are not set to resume until Nov. 27, the arrival in Bagdad of chief weapons inspector Dr. Hans Blix was enough to rekindle fears that Saddam Hussein would not fully comply with the U.N. mandate. December crude rose $1.20 Monday to close at $26.71, just a few cents beneath its new two-week high at $26.75.

However, the natural gas futures market may have its own supply worries — unrelated to tensions in the Middle East. According to the latest monthly report by Stephen Smith Energy Associates, higher prices, and increased drilling may not be enough to ease the gas production decline going forward. The Mississippi-based analysts noted that the basic conclusion remains that two years of drilling at $4-plus prices “could not reverse, on a sustained basis, a domestic production decline…The end result was that market balance was achieved by gas prices that were sufficiently high to destroy the most price-elastic demand (see related story this issue).

That long-lead production outlook comes on the heels of storage withdrawals that attest to the same. Last week the Energy Information Administration said that a larger-than-expected 48 Bcf was pulled from the ground for the week ending Nov. 8. A week earlier, the EIA announced a sizable 27 Bcf reduction for the week ending Nov. 1. Having been surprised by the largeness of those two decreases, analysts are reworking their numbers for this Thursday’s report.

“We are confused by last week’s surprisingly strong 48 Bcf withdrawal,” wrote Thomas Driscoll of Lehman Brothers in New York in a note to clients (he had called for a 10 Bcf withdrawal). “We have added an allowance of 5 Bcf to this week’s withdrawal estimate (bringing it to 25 Bcf) just in case last week’s strong withdrawal is the beginning of a trend.”

Noting that lower degree day heating data failed to produce bearish storage data last week, Tim Evans of IFR Pegasus in New York calls for a 10-30 Bcf withdrawal, which should compare bullishly against last year’s 33 Bcf build.

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.