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Slight Temperature Softening Seen; February Called 8 Cents Lower

February natural gas is set to open 8 cents lower Wednesday morning at $3.33 as weather forecasts moderate slightly and traders admit to a market that in the short term is balanced principally by demand, i.e., weather. Overnight oil markets fell.

Overnight weather models showed the pattern of a cold West and warm East continuing. "[Wednesday's] six-10 day period forecast is a little warmer over the East and cooler over the West," said WSI Corp. in its morning report to clients. "CONUS GWHDDs are down 1.1 to 113.3 for the period, [and] these are 41.3 below average.

"The timing and details of storm systems could alter the CONUS forecast in either direction. Any warmer risks are pretty limited at this point though, perhaps greatest over portions of the southern and eastern U.S. There are minor colder risks across the central states and interior West by the end of the period."

Analysts see only minor production gains and wide-swinging demand driving market balances and, by extension, prices.

"Fundamentals tightened week on-week for week ended 6 January, with supply holding stable but demand up 13%. The week-on-week trend has been anything but consistent this winter," said Breanne Dougherty, an analyst with Societe Generale in New York. "The relative tightening seen in week ended 6 January's balances is deeply skewed by the very demand weak base set by the prior week. Volatile weather patterns are translating into a very volatile demand pattern.

"Demand increased for week ended 6 January by nearly 11.5 Bcf/d (13%), relative to the prior week. The gain was largely seen in the residential/commercial segment, but both power generation and industrial also showed some strengthening. Almost all of the demand variability is, of course, tied to weather.

"Supply was a negligible 0.1% stronger for week ended 6 January. The supply side of the ledger has underperformed our expectation thus far this winter in aggregate volume, due entirely to the still-struggling domestic production average, but it has met our expectation for consistency. This means that the winter ledger has been entirely at the mercy of volatile demand."

Although often an outlier, Tim Evans of Citi Futures Perspective calculates a withdrawal of 216 Bcf in Thursday's storage report, well above last year and five-year averages.

Tom Saal, vice president at FCStone Latin America, in his work with Market Profile says to look for the market to test Tuesday's value area at $3.408 to $3.380 and "could test" $3.316 to $3.266. "Maybe" the market tests "$3.142 to $3.110, he said in a morning note to clients.

In overnight Globex trading February crude oil fell 77 cents to  $51.71/bbl and February RBOB gasoline gave up 2 cents to $1.6044/gal.

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