Amid the bullish combination of cold temperatures in the short-term outlook and warm temperatures in the long-lead forecast, natural gas futures rallied to their highest weekly close in five months Friday on continued short-covering by large speculative traders. The April contract received the biggest buying boost, trading 15.2 cents higher to close at $3.076. In doing so, it moved through resistance clustered at early-week highs in the $3.03-04 area.

According to the latest six- to 10-day forecast released Friday by the National Weather Service (NWS), cold air will invade a large swath of the country from the Pacific Northwest across to the Great Lakes and as far south as the northern border of New Mexico and Oklahoma. Also expected to see below normal temperatures is the Northeast, where arctic air is expected to linger through at least March 25. Meanwhile, above-normal temperatures are expected in the Southeast.

Further out on the horizon, warm weather forecasts for the late spring and early summer could translate into heavy gas demand for electric generation. According the latest 30- and 90-day outlooks released Thursday by NWS, above normal temperatures are expected across much of the West and through parts of the Southeast through early summer. In fact, the April through June outlook calls for above normal temperatures across a 12-state area extending from Washington state to Louisiana. Included in this area are the gas-reliant states of California, Arizona and Texas.

However, even with the price-supportive weather outlooks, many traders believe the fundamental picture remains negative and that prices should eventually fall. “Natural gas prices continue to work blithely higher, as if they haven’t got a care in the world, oblivious to [their] overvaluation relative to past historical performance, or even seasonal factors,” said Tim Evans of IFR Pegasus in New York. Citing the storage overhang as a key factor, Evans goes on to suggest that even if the 897 Bcf surplus to last year is erased this summer, the market will still be faced with 3,144 Bcf when the withdrawal season resumes in November. “We think the market will be truly physically tight for the heating season of 2003/04 at the earliest. For the current herd of bulls, that’s an awfully long time to wait.”

And while Evans makes a good case for lower prices, Tom Saal of Pioneer Futures in Miami makes an equally compelling case for higher prices. “This has been lower than it should have been based on fundamentals. It is just now getting back to its fundamental equilibrium.” Saal goes on to explain this rather bold statement by pointing to the large speculative short position that has been slowly liquidated by the funds over the past eight weeks. “Without their more than 60,000 shorts, this market would have never dropped so low,” he reasoned.

With that being said, Saal believes that we are just about back to “fundamental equilibrium” now that the non-commercials are just about close to being flat. The latest Commitments of Traders report shows the group to hold a net short position of 17,140 as of March 12. Since that time the April contract has moved another 7 cents higher, as undoubtedly more of those shorts have headed for the exits.

Looking ahead, it is worth noting that the last time the non-commercials flipped from a net-short holding to a net-long position was back in January of 2000 when prices began their steep climb to the $10 mark at the end of that year. And although Saal is not quite ready to suggest we are in for a repeat of that performance, he admits that if the funds continue to flip their short positions in favor of longs, this market still has plenty of upside left.

In daily technicals, the first big hurdle is the $3.44 level, which corresponds to the interim high achieved last Halloween, between the near symmetrical lows notched on the continuation chart at $1.76 and $1.85. Support is seen at $2.78.

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