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Natural Gas, Crude Futures Pare Gains

Natural gas remained positive after the government reported a supply drop on Thursday.



) -- Natural gas and crude oil prices were higher, but giving up some earlier gains, as a December cold spell in the U.S. helped support prices in the morning.

The January delivery contract for natural gas on the Nymex was continuing its rally, though coming down from earlier session highs. The contract recently added 3 cents to $5.80 per million British thermal units, a day after the

government reported a sharp draw down in inventory. The reported withdrawal of some 207 billion cubic feet last week fueled a surge in futures on Thursday to their highest levels in nearly a year. The contract ultimately settled 31 cents higher at $5.46 per million BTUs.

Though there is still a glut of supply, two consecutive weeks of natural gas drawdowns has one analyst thinking that a realignment may be afoot.

"I think the market has underestimated the amount of demand destruction that took place over the summer, and I think this demand destruction potentially masked the amount of supply destruction -- vis-a-vis, the shutting of these wells that we've seen -- and I think the market is now playing catch up to this, and hence the strength in natural gas prices," said Stephen Schork, analyst and editor of the energy newsletter

The Schork Report

. "Look, I'm not ready to get super bullish on natural gas because there's still a significant amount of spare capacity sitting out there. But I think the last two reports signal a tectonic shift in the fundamentals as we've understood them for the better part of this year. I think it's dawning on the market that it's time to reevaluate the supply/demand equations."


U.S. Natural Gas Fund

(UNG) - Get Report

rose 1.5%, while shares for

Chesapeake Energy

(CHK) - Get Report


Devon Energy

(DVN) - Get Report

were adding 3.5% and 1.2%.

Anadarko Petroleum

(APC) - Get Report

was slumping by 0.7% in the morning.

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The January crude oil contract climbed above $74 on Friday, though the contract is retreating from highs. The contract recently added 34 cents to $72.99 a barrel. An

inventory report on Wednesday showing easing supplies helped prop up prices, though futures ended relatively flat on Thursday.

"I think the market is more technically driven at this point," said Gene McGillian, analyst and broker at Tradition Energy, noting that it's not surprising to see prices range between $69 and $75 right now. "The market is torn between the fundamental picture and prospects for an improving economy which will help stimulate demand. That's going to be playing out in the weeks to come."

Market watchers were also eyeing geopolitical tensions in the Middle East. Reports swirled in the morning that an Iranian force seized an oil well in southern Iraq, which some were attributing as support for the earlier spike in morning prices.

The curious timing of the brouhaha also comes ahead of a meeting of oil ministers next week. The Organization of the Petroleum Exporting Countries, of which both Iraq and Iran are a part, will meet on Dec. 22 in Luanda, Angola. Many expect that OPEC will keep output levels unchanged at the conclusion of the get together.

Looking ahead, McGillian notes that the holiday season will likely increase illiquidity and price volatility as traders head to the sidelines for the break. "As long as the market continues to remain in this range we've seen in the last four or five weeks, the price moves will be because of thinness in the market more than anything else, unless something does happen," he added.

The NYSE Arca Oil Index was declining by 0.2% on Friday.

Exxon Mobil

(XOM) - Get Report

shares recently shed 0.4% to $67.98. Fellow integrated operations lost ground, with


(CVX) - Get Report

slipping 0.1% and


(COP) - Get Report

declining by 1.3%.

Suncor Energy

(SU) - Get Report

shares slid 1.1% to $33.87. On Thursday, the company reported a fire at an oil sands facility in Canada. It also expects production to be reduced while repairs are made.

Elsewhere on the Nymex, January heating oil advanced a fraction of a penny to $1.96 a gallon, as January gasoline rose 1 cent to $1.87 a gallon.


Written by Sung Moss in New York