Buoyed by weather forecasts, storage jitters, and strength in the cash market, natural gas futures erupted higher Wednesday as new buying competed with short covering in an expiration-day free-for-all. The February contract advanced 21.6 cents to go off the board at $5.66. However, the real story may have been the March contract, which gapped higher at the opening bell and did not look back as it advanced 27 cents to close $5.629. At 119,571 estimated volume was average for expiration day.

After watching cash prices drop by a half dollar to converge lower with futures prices Tuesday, traders did not expect to see futures prices rally like they did. However, when cash prices headed north again Wednesday, the futures market had little choice but to follow, traders agreed. NGI‘s Henry Hub spot price average finished at $5.62 up 12 cents for the day.

“Futures drifted to cash [Wednesday],” said Tom Saal of Commercial Brokerage Corp. in Miami. “Once it caught up with cash, it just drifted sideways for the rest of the session. It was a very orderly close.”

However, Tim Evans of New York-based IFR Pegasus argued that February’s spike Wednesday was set in motion by strength in the March contract rather than the cash market. “We note that March led [Wednesday’s] advance, not a February expiration spike, reinforcing the idea that there are intermediate-term factors involved, not just a convergence with the cash market,” he wrote in a note to clients.

For Evans, the intermediate-term factors are storage and weather. “Reports that demand in the Northeast last week may have set an all-time record and expectations for Thursday’s DOE storage report running as high as a 260 Bcf withdrawal [helped] drove prices higher,” he continued.

Although Evans’ own estimate is for a more modest 210-230 Bcf draw, a number of that magnitude will easily dwarf the year-ago 112 Bcf takeaway as well as the five-year average decline of 142 Bcf. Last week the market dropped 21 cents despite news that 210 Bcf had been pulled from the ground during the week ending Jan. 17.

Sensing that the March contract may carry some momentum with it when it takes over as prompt contract Thursday, Saal looks for a move up to $5.71, which represents a 50% upward extension of that contract’s $5.28-57 initial balance for the week.

Looking ahead, Saal is hesitant to bet too heavily on the latest weather forecasts, which after calling for above-normal temperatures now show below-normal readings across much of the country for the Feb. 4-8 timeframe. “This market has been burned by trading on forecasts that then fail to show up. It’s not going to sell-off on a forecast,” he predicted.

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