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Natural gas prices snap back on cold weather outlook

Natural gas futures bounced back sharply Monday as forecasts showed colder weather on the horizon that could drive up demand for heating fuels.

The latest six-to-10-day National Oceanic and Atmospheric Administration forecast shows more normal temperatures for the East Coast and parts of the Midwest, and cooler weather in the South and Southeast, as well as parts of the West and Midwest. The NOAA forecast map also shows warmer-than-normal temperatures for Alaska, and in a separate band across New York state and into the northern Midwest.

Natural gas futures for February soared more than 8 percent to $2.24 per million BTUs Monday. Natural gas futures were at 1999 levels Dec. 17 as the weather outlook promised a balmy December. The front month January contract expires on Wednesday, and it rose 9.8 percent to settle Monday at $2.228/mmBTU.

"When you're talking normal temperatures this time of year, you're talking heating demand. Basically, we're going to have to turn the thermostat back up and put a coat on," said Gene McGillian, energy analyst with Tradition Energy. "Whenever you see any kind of cold showing up in a forecast where you haven't seen it, there is a snap back … considering how much gas we have in the ground, the 50 cents rebound shouldn't last too long."

McGillian said short-covering added to the price spike. "We have a pretty sizable speculative short position in the market that would be vulnerable to year-end covering," he said.

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Jacob Meisel, chief meteorologist at Bespoke Weather Services, said the longer-term, eight-to-14-day forecast shows a return to above-normal temperatures, but his longer-term models show colder weather and temperatures that are even below normal. "The eight-to-14-day forecast shows much less cold than a lot of other models show in the 10- to 15- to 20-day timeframe. Any warmup is not going to be as sustained as previously expected," he said.

"The coldest temperatures look to be centered from the South to Southeast. We could see colder weather work into the Midwest and Northeast," said Meisel.

Meisel said the market volatility is the result of the uncertainty of the forecasts, as traders try to calculate winter heating demand.

"Many had thought the December warmth would linger into January and there'd be natural gas oversupply. … Now as soon as even this week, literally in four days, the South and the Southeast will be trending colder. That was what helped spike the market last week. Now we're seeing indications that another cold shot comes in week two and week three of January and it's going to elevate heating demand likely above levels many had expected for January," he said.

John Kilduff of Again Capital said natural gas futures were extremely oversold and the bounce back is not unexpected. "It was priced for Florida weather for the whole stretch," said Kilduff.

Meisel said El Nino has made weather conditions particularly difficult to forecast, and it does appear to be easing.

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"What we're seeing right now is a temporary easing of El Nino across the Pacific Ocean due to a Kelvin wave moving across the Pacific and that can cool off warm waters," said Meisel. "Standard El Nino conditions are likely to ease, that is to allow more cold air to spill down from the North Pole, and we're also seeing signs the polar pattern is changing."

UPDATE: Corrects January contract settle price was $2.228. That number was misstated in an earlier version