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January 2017 natural gas hits 2-year high in penultimate session

January 2017 natural gas futures probed higher in the post-Christmas holiday session Tuesday, Dec. 27, with options expired at the close of business and the contract set to roll off the board at Wednesday's settle. Cold weather in forecasts was behind the day's gains as the market considered strong demand and a more rapid erosion of natural gas inventories.

In its penultimate session as the lead contract, January 2017 natural gas reached a better-than-two-year intraday high of $3.778/MMBtu, before closing the session at $3.761/MMBtu, another 9.9 cents higher, with book squaring ahead of expiration adding to volatility.

The primary catalyst for the ongoing upside support is weather, as the latest forecasts from the National Oceanic and Atmospheric Administration show above-average temperatures in the eastern third of the country and across portions of the southern U.S. in the six- to 10-day period, giving way to mostly average and below-average temperatures in the eight- to 14-day outlook.

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Above-average temperatures will linger in small portions of the Northeast and Southeast in the longer-range period, while the majority of the country will see below-average temperatures.

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An increased appetite for heating due to the cold weather is driving natural gas demand higher, resulting in an increased pace of storage erosion.

The natural gas supply took an impressive hit in the week to Dec. 16, falling 209 Bcf to a total working gas inventory of 3,597 Bcf, or 226 Bcf below the same week in 2015 and 78 Bcf above the five-year average of 3,519 Bcf.

Following the surprisingly large storage pull, analysts and traders expect the upcoming inventory report for the week to Dec. 23 to show a withdrawal ranged from the upper 190s Bcf to the low 210s Bcf. A withdrawal within the range of expectations will erase the year-on-five-year-average storage overhang, as the pull will compare against an 80-Bcf five-year-average draw and the 50-Bcf withdrawal reported for the corresponding week in 2015.

Concerns are mounting as the natural gas supply is worn away, with plenty of the peak winter heating season left and more cold weather on tap.

Longer-range, The Weather Company said in its most recent outlook that January 2017 will bring warmer-than-usual temperatures to much of the country, with colder-than-normal conditions anticipated for the Northwest and Southwest.

In February 2017, slightly above-normal temperatures are eyed for the Northeast, with warmer-than-average temperatures seen for the Southeast, south-central U.S. and the Southwest. Colder-than-normal conditions are anticipated in the north-central U.S. and the Northwest.

For March 2017, warmer-than-normal weather is projected for the Northeast, Southeast, south-central U.S. and the Southwest. Colder-than-usual temperatures are eyed for the north-central region and the Northwest in March 2017.

Day-ahead markets were higher with the combined support of cold weather and the natural gas futures rally.

Transco Zone 6 NY traded nearly 35 cents higher to an index near $3.60, and Tetco-M3 trades were about 25 cents higher to an index around $3.40. At the Henry Hub, trades were about 10 cents higher to an index near $3.70, while Waha and Chicago each traded about 5 cents higher to indexes near $3.40 and $3.60, respectively. In the West, gains on either side of 5 cents brought SoCal Border to an index near $3.60 and PG&E Gate near $3.90.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power, natural gas and coal index prices, as well as forwards and futures, visit our Commodities Pages.