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Near-Term Cold Seen Yielding to Production Gains; March Called 2 Cents Lower

March natural gas is set to open 2 cents lower Wednesday morning at $2.74 as traders grapple with ongoing cold but expect hefty production to eventually temper any major price advances. Overnight oil markets slumped.

Buyers for gas-fired power generation across the broad PJM footprint can expect bitter cold, but also hefty wind generation. WSI Corp. in its Wednesday morning outlook said, "A frontal system is expected to traverse the power pool [Wednesday] into tonight with a brief round of light snow. A gusty northwest wind behind this system and low pressure off the New England coast will usher a reinforcing shot of near-record arctic air into the power pool for the end of the week. Lows may range from below zero to the mid-teens. Highs may range in the single digits, teens to low 20s, [and] a complex frontal system may develop late Friday night into the weekend. Precipitation may begin as a swath of snow and wintry mix, but this may transition to rain in many areas.

"A gusty northwest wind will lead to a period of elevated wind generation during the next couple of days at which point output may peak in excess of 4 GW. Wind generation may briefly drop off late Thursday but may rebound during Friday into the weekend."

In spite of the near-term cold pummeling the nation, analysts still see the longer-term price driver to be hefty production.

"This market is currently edging up to highest levels of this year as cold temperature views are now being stretched into the first week of March," said Jim Ritterbusch of Ritterbusch and Associates in a note to clients. "Although some moderation is expected by the end of next week, views extending all the way out to about March 3rd are still favoring significantly below normal trends across the eastern half of the U.S. However, the weather-related strength of the past week has been orderly as gains have been checked by a string of smaller than expected storage withdrawals that are still being influenced to some degree by a stronger pace of production than generally expected.

"[A]lthough the severe cold that is expected to extend all the way into Texas during the next couple of weeks will be forcing some freeze-offs, the market will likely be shifting focus to the month of March when weather related curtailments generally prove negligible. In any event, nearby futures have proven a bit stronger than we had anticipated with the March contract advancing to around the high side of our suggested $2.80-2.88 sell zone. We remain of the opinion that it is premature to rule out new two and a half year lows in this market based on outlooks for a continued strong production pace that appears capable of trending higher through this spring and summer period."

Tom Saal, vice president at INTL FC Stone in Miami, in his work with Market Profile expects the market to test Tuesday's value area at $2.781 to $2.721 and "then test" $2.608 to $2.582. "Eventually," he says, the market should test $2.943 to $2.911. "Market participants' behavior continues to reveal horizontal pricing and possible 'bottoming' action. Buyers be ready for hedge trading strategies."

In overnight Globex trading March crude oil dropped $1.13 to $52.40/bbl and March RBOB gasoline fell 4 cents to $1.5511/gal.

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