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Additional Shorts Ill-Advised, Trader Says; January Called 4 Cents Lower

January natural gas is set to open 4 cents lower Tuesday morning at $2.03 as traders study forecasts calling for mild temperatures in eastern and Midwest markets out to Christmas. Overnight oil markets continued to weaken.

It's hard to imagine the weather outlook into December being as mild as it is, but overnight model runs re-affirmed the trend to milder conditions, principally in the population centers of the Midwest and East. WSI Corp in its Tuesday morning report said GWHDDs in the six- to 10-day period decreased and in the 11- to 15-day period GWHDDs rose somewhat but are still way above normal.

"The 11-15 day forecast features more above-average temperatures over the majority of the central and eastern U.S.; below-average temperatures are expected across the West. [Tuesday's] forecast is a bit cooler over the East and warmer over the central U.S. GWHDDs are up 1.5 for days 11-14 and is forecast to be 124.4 for the period. This is still 26 HDDs below average," the forecaster said.

"Forecast confidence is only average at best today. Medium-range models show common themes but differ with the details and amplitude of the pattern. Given the warm forecast, there aren't many upside risks. The Rockies and Plains have the greatest upside risk. The East and West Coasts have risks to the cooler side."

In the six- to 10-day time frame the forecaster said, "Today's forecast is generally a little warmer than yesterday's forecast. Period GWHDDs are down 1.8 and are forecast to be 107.6 for the CONUS."

Given the severity of Monday's January futures decline, traders aren't willing to push the short side further. "This market continues to be pressured lower by an extension of mild temperature views across the eastern half of the nation out toward the Christmas holiday season in some cases," said Jim Ritterbusch of Ritterbusch and Associates in a Tuesday morning note to clients.

"This implies some downsized storage draws going forward that will be increasing worries over excess supply come next spring. As far as this week's storage report is concerned, we won't be expecting a withdrawal far removed from average levels. However, assuming no significant shifts in the weather views, this market would need a bullish shocker, such as a figure similar to last week's 53 Bcf draw, even to piece together a return to [Monday's] high.

"Our previously stated downside price parameter of $2.05 was almost achieved today, and we will look for a solid test or violation in tomorrow's trade. As is the case in the oil, the fundamental environment remains too negative to support any attempts to pick a bottom. But at the same time, we will caution against fresh entry into the short side given the proximity of our downside target."

In overnight Globex trading January crude oil fell 70 cents to $36.95/bbl and January RBOB gasoline dropped a half cent to $1.2046/gal.

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