Rescinding gains made shortly after the opening bell, the natural gas futures market was sent lower Thursday morning by traders unimpressed with government estimates suggesting that 134 Bcf was pulled from storage last week. However, after bottoming out at $6.75 shortly before 11 a.m. EST, the January 2004 contract — boosted by supportive weather and cash prices — mounted a sustained rally that resulting in its second-highest-ever settlement price. It closed at $7.122, up 12.9 cents for the session.

According to the Energy Information Administration, storage fell 134 Bcf last week to 2,850 Bcf. While the number was slightly above consensus estimates centered on a 130 Bcf drawdown, it fell far short of last year’s 159 Bcf tally. Storage now stands 39 Bcf above the five-year average and 215 Bcf more than the level from a year ago.

Thursday’s sell-off is not the first time futures have slipped despite a seemingly bullish storage report. Last week the market was able to shrug off a larger-than-expected 111 Bcf takeaway to trend lower in another day of volatile trading. “This was a disappointment to the bulls,” said George Leide of Rafferty Technical Research in New York. “Our survey showed an average expectation of 138 Bcf, but the smart money was down in the low 130s (withdrawal).”

Having rallied to within striking distance of last Friday’s $7.25 high, gas futures sat at a pivotal point just prior to the number’s release, Leide observed. As it turns out, the longs were the first to blink and profit-taking ushered the market lower. However, those losses were short-lived and after steadying, the market was bid higher in concert with private weather forecasts suggesting a very chilly start to the new year.

“We have concluded that there are high odds of a major polar surge into the eastern half of the nation commencing New Year’s week,” wrote New York-based Weather 2000 in a note to customers Thursday. “The upper Midwest will likely get first licks, but the cold air coverage should reach the deep South within 1-2 days and the Atlantic 2-3 days henceforth. This should be the chilliest and wide-reaching coverage of cold air the nation has seen [this season],” the group continued, noting unabashedly that National Weather Service intermediate-term outlooks will begin to depict temperatures consistent with their analysis.

And while Weather 2000 may be right and the NWS may come around to forecasting the same chilly weather, it likely won’t occur until updated forecasts are released next week. Currently, the NWS eight- to 14-day outlook — its longest-lead intermediate-term forecast — only covers the period Dec. 26 – Jan. 1. It is consistent with previous NWS outlooks in calling for mostly above-normal temperatures for the Midwest and Northeast.

However, even if the Arctic air invades the middle latitudes of North America, it may not drop temperatures to Arctic levels, argues Citigroup analyst Kyle Cooper. Once again, higher latitude temperatures are currently not very impressive in relation to previous years and even an atmospheric pattern that allows Arctic air to flow down into the lower 48 states migh not generate extremely cold temperatures,” he reasoned.

With the market nestled near the middle of its recent $6.50-7.55 trading range, Leide is reluctant to initiate a position. Instead, he is advising his clients to take a wait-and-see approach — layer in on the long side should the market trend down toward support at $6.50 and cautiously short the market on a move toward the $7.55-60 area. A break above or below those levels would prompt Leide to cover or liquidate that position in a hurry. “If we breakout, we could see either $8.00 or $5.75 in a hurry,” he warned.

Another strategy that Leide is planning is selling options volatility. Having observed options volatility blowing out to 100% or more on recent spikes only to compress back down in a sell-off, Leide is looking to capture that premium. Because February volatility currently sits at 80%, he is on the sidelines, but a move back toward 100% would be tempting, he said.

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