After watching patiently as natural gas futures prices failed to break below support over the past week, bulls traders got their turn Tuesday. Sensing the shifting tide, locals were the first to rear their horns as they hunted for buy stops on the way up. Commercial players added to the buying, which gained popularity throughout the session and was therefore heaviest heading into settlement.

December closed at $4.869, up 15.8 cents for the session and just below its $4.90 high notched moments before the closing bell.

Heading into Tuesday’s trading session, one would hardly label the fundamental picture as “bullish.” Weather forecasts were calling for normal and above normal temperatures this week and expectations are centered on at least one more storage injection figure to be announced Thursday. Price-negative factors, one would think… However, that analysis would fail to take into account what prices have done over the past week to 10 days. After dropping to the $4.60-64 area at the end of October, the December futures contract stabilized last week, shifting the balance of power back to the market bulls.

“You have got to be concerned by a market that should go lower and doesn’t,” a broker commented. “Sometimes you have to look not at what the market did, but rather what the market failed to do.” Technical factors agreed with this logic, prompting technicians to call for a rebound Tuesday (see Daily GPI, Nov. 11). Local traders were the first out of the chute, bidding the market higher in buying surges late in the morning and then again near the close.

However, market watchers agree that in order for prices to continue to rally, it will require the considerable short-covering efforts of fund traders. As of a week ago, these non-commercial accounts held a net-short position of nearly 51,000 — their largest net short since February of 2002. If history were to repeat itself and these speculators were to rush to cover, it could mean dramatically higher prices. From February 2002 to February 2003, non-commercial traders reversed themselves from a net short holding of 53,000 to a long position of nearly 33,000. During that period, prices rose from $1.85 to slightly more than $10.

However, just because the funds were short last week 51,000 contracts does not necessarily mean they are poised to cover. In fact, they have held as large a net short position as 62,643. Were they participants in the rally Tuesday? It is difficult to know for sure until we get a glimpse of the next Commitments of Traders report set to be released Friday. But, considering the volume of trading Tuesday was only 67,150, it is safe to say they remained mostly on the sidelines and firmly entrenched in their shorts.

While impressed by the move through $4.80 and $4.83 Tuesday, Tim Evans of IFR Pegasus believes the real test will come at the $5.02 high notched Nov. 6. “We see longer-term selling at $5.60, $5.80 and $6.10 as possible targets for the market to try for and not necessarily firm limits at that, depending on the degree of short covering that can be achieved. The early October run was only a partial cycle. A complete round of short-covering could conceivably carry the prices even higher,” Evans judged.

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