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Traders Forced to Digest Widely Varying Weather Models; February Called Flat

February natural gas is expected to open unchanged Wednesday morning at $3.28 as weather models show wide variations in outlooks. Overnight oil markets fell.

Overnight weather models came in mostly milder, but forecasters admit to conflicted model interpretations and a highly variable weather landscape.

"Changes were mostly in the down direction [Wednesday] morning regarding the demand situation, with warmer short- to medium-range changes for the Midwest, East, South with very slightly colder West adjustments," said Matt Rogers, president of Commodity Weather Group. "The American [ensemble] is colder toward the East Coast than the European [ensemble] for the six-10 day, while the European is warmer in the Midcontinent than the American.

"We like a split down the middle that amplifies both sides in this variable pattern situation. Otherwise, the 11-15 day continues to be a big mess, too, with the American ensemble showing cold from Chicago to New York and the European holding a warm lean for these same areas (the Canadian is in the middle of them both)."

Bulls take heart. Industry consultant Genscape reports substantive year-on-year production declines. In a Wednesday morning report to clients it said, "January month-to-date production is averaging 70.68Bcf/d, a 0.94 Bcf/d decline versus January 2016. As per the norm for most of 2016, Northeast and Permian gains (up 1.37 Bcf/d year over year and 0.19 Bcf/d y/y, respectively) are being overwhelmed by non-Northeast declines (led by a 0.95 Bcf/d y/y drop in Rockies; 0.78 Bcf/d y/y drop in Midcon; 0.55 Bcf/d y/y drop in Texas; 0.19 Bcf/d y/y drop in Gulf Coast and San Juan)."

Analysts are expecting a well below-average inventory withdrawal in Thursday's Energy Information Administration (EIA) storage report, followed by a similar thin draw for the week of Jan. 27. Tim Evans of Citi Futures Perspective calculates a withdrawal of 128 Bcf for the week ending Jan. 20 and by Feb. 10 storage will be just 33 Bcf less than the five-year average.

"Under this storage scenario, we see considerable week-to-week volatility in the pull from storage, but with the total tracking near the five-year average level overall. Often when the year-on-five-year average surplus or deficit is little changed, indicating no physical tightening or easing on a seasonally adjusted basis, we'll see natural gas prices either chop sideways or find other reasons to trend," said Evans.

In overnight Globex trading March crude oil fell 47 cents to  $52.71/bbl and March RBOB gasoline gave up 3 cents to $1.5702/gal.

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