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Storage Deficit Reduction Still In Play; January Called 3 Cents Lower

January natural gas is expected to open 3 cents lower Wednesday morning at $3.14 as traders factor in another outsized reduction in the storage deficit and weather forecasts show no market-altering cold. Overnight oil markets slumped.

Forecasts overnight turned slightly cooler. WSI Corp. in its Wednesday morning six- to 10-day outlook said, "[Wednesday's] forecast is generally colder than the previous forecast across the majority of the nation due in part to the day shift. Forecast confidence is average as there remains good model agreement and consistency that a colder pattern will emerge. However, there are still usual technical and timing differences. There may remain a slight downside risk across a good portion of the nation, except for California."

The below-normal temperatures are far from the bone-rattling cold of last year's polar vortex. According to WSI, in one week the three-day highs in Chicago are forecast at 19, 18 and 22, a little more than 10 degrees off the normal high of 32. Detroit is expected to see highs of 21, 24 and 21. The seasonal high in Detroit is 33.

Analysts see a weather-driven continuation of the contraction in the year-on-five-year storage deficit. Jim Ritterbusch of Ritterbusch and Associates in closing comments Tuesday said, "this week's [temperature] trends have proven much milder than forecasts of just a week or so ago. For instance, Chicago is likely to see 50 degree temperatures [Tuesday] while major East Coast areas could see temps as high as 60 degrees later this week. As a result, tomorrow's major contraction in the supply deficit against average levels is apt to be followed by another sharply downsized withdrawal next week.

"Given these weather views, the contraction in the year-over-year shortfall of more than 200 Bcf could be seen across this month. Meanwhile, production is also being accommodated by the mild weather trends. At the end of the day, expectations for an erasure of the storage deficit against normal levels is still being pushed forward during the upcoming quarter, with supplies widely viewed as ample to meet the needs of an even colder than usual January-February.

"Looking ahead to [Wednesday's] trade, we won't rule out a 'three-peat' in which a seemingly bullish storage withdrawal, such as a decline of more than 75 Bcf, could easily be followed again by a significant selloff that could carry to the 3.05 level. And unless temperature views shift back to the cool side, a $2 price handle is not off the table by early next week given an exceptionally weak physical trade that saw Henry Hub drop to as low as $2.90 [Tuesday]."

A 75 Bcf withdrawal in the 12:00 p.m. EST Energy Information Administration storage report would be well above industry expectations. Last year, a hefty 193 Bcf was withdrawn, and the five-year average stands at a 138 Bcf pull. IAF Advisors calculates a withdrawal of 58 Bcf, and ICAP Energy is looking for a pull of 60 Bcf. A Reuters poll of 20 traders and analysts revealed an average 64 Bcf reduction with a range of 55-73 Bcf.

In overnight Globex trading February crude oil dropped $1.09 to $56.03/bbl and February RBOB gasoline skidded 4 cents to $1.5496/gal.

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