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Futures Bears See Friday's Slippage as a Sign of Things to Come

Futures Bears See Friday's Slippage as a Sign of Things to Come

Caught between short-term weather/storage bulls and long-term bears betting against another price spike like spring 2003, the natural gas futures market chopped quietly sideways to close out the week.

Even the settlement prices were mixed Friday, as the prompt month slipped 4.6 cents to close at $5.354 while the out months notched modest gains. At 56,677, estimated volume was fairly impressive for a Friday.

Sources polled by NGI Thursday were right in calling for the market to continue higher in early trading Friday. However, the rebound met with a steady flow of non-commercial selling and the buyers eventually relented. The March contract finished in the lower half of its $5.29-46 trading range Friday.

According to the Energy Information Administration, a whopping 236 Bcf was pulled from storage last week, depleting inventories to 1,827 Bcf. Not only was the withdrawal the largest so far this season and the fifth largest in the 10-year data series, it easily exceeded nearly all market expectations clustered in the 200-230 Bcf range. It also easily trumped the year-ago and five-year average draws of 208 Bcf and 133 Bcf, respectively. At just 60 Bcf, the current surplus to the five-year average has shrunk appreciably from the nearly 200 Bcf buffer the market enjoyed for most of January.

And while it is easy to view the data as constructive in the short-term, market-watchers are quick to note the bearish case for the current situation. "I still don't think the [236 Bcf draw] is that bullish," said Tom Saal of Commercial Brokerage Corp. in Miami. "It is unlikely we will see another withdraw of that magnitude this season.... The closer we get to spring the less chance we have of seeing another 200+ Bcf draw."

That sentiment is echoed by analysts from UBS, Citigroup and Lehman Brothers whose ending inventory estimates in the 1,000-1,150 Bcf range, are in line with the 1,097 Bcf five-year average. By comparison, storage levels dipped to the near-record low of 660 Bcf last April, pushing prices well past the $10 mark.

Saal makes the case that prices this year would be moving lower with more alacrity were it not for the memory of the price spike of February/March 2003. "This is a tug of war and there are those out there not ready to give up [on winter]."

Even the most jaded bull, however, may have a difficult time looking past the latest weather forecasts issued after the closing bell Friday. According to the National Weather Service six- to 10-day forecast, the below normal temperatures experienced by much of the country over the past couple weeks will undergo a gradual moderation -- starting with the West -- toward the middle of the month.

Specifically, the NWS calls for above normal temperatures on the West Coast and across the Northern Plains to contrast sharply with the continued below-normal readings in the eastern half of the country. Further out in the NWS eight- to 14-day outlook, the warm air is predicted to encroach to the East, bringing normal mercury readings to the gas-guzzling states of Illinois, Wisconsin and Michigan.

In daily technicals, Saal sees support in the $5.20-25 area, which represents the confluence of Thursday's low and Saal's estimate for the average cost of the gas currently in the ground. Psychological buying is likely in conjunction with the $5.00 mark, chips in Tim Evans of IFR Pegasus in New York. Further to the downside, Craig Coberly of GSC Energy in Atlanta remains a bull so long as the March contract doesn't break below key long-term Gann line support at $4.92.

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