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Futures Gain a Few Pennies as Year-End, Warmer Temperatures Loom

After hitting their head on resistance at the $14.490 level in the overnight Access trading session, January natural gas futures opened Tuesday's regular session at $13.950. Following tests in both directions during the regular session, the prompt month ended up settling near flat at $14.080, up just 3.7 cents from Monday's close.

The January contract carved out support at $13.750 in morning trade before rallying higher. The contract notched a high for the day of $14.245 just after 12:30 p.m. EST before sinking lower to close.

In addition to the year-end trading slump and New York City's transit worker strike, traders also have to contend with moderating temperature forecasts. Market watchers wonder how long futures can sustain these lofty price levels as unseasonably warm temperatures are expected to overtake a majority of the U.S. later this month.

"It has been a little slow out there and I think that is a result of the lack of confidence in the market direction," said Brad Florer, a broker with ICAP Energy. "I am not sure anybody is very confident on where we go from here. Despite the upcoming holidays and the mass transit strike in New York City, it sounded like the natural gas pit had a fairly normal amount of people there Tuesday."

Commenting on the various chart patterns -- from a "head and shoulders" formation to the Elliot Wave theory -- being offered up by technicians to explain this market, Florer said there seems to be an "awful lot of speculation" and nobody seems willing to put a bet down. "It seems to me that when the market moves in a direction, we either have short-covering or profit-taking. What we don't see is any new buying or any new selling," he said. "We just see these little short waves, which happen to be $1 in our current market. When the guys decide to ring the register, there is no one to take the other side. What I think we have is some broad consolidation going on here."

Looking at the big picture, Florer said the current bias is still bullish. "However, with reports that January might not be that cold and demand destruction likely playing a larger role, I think there will be some downward pressure on this market down the road. The demand destruction issue, which I think has only affected industrials so far, will likely set in more for commercial and residential customers once they get their heating bills for December."

On the upside, Florer said the biggest thing the bulls still have going for them is fear, including fear of production issues and fear of the potential for more cold later in the winter. "There really seems to be a lot of nervousness and not a lot of volume, which has provided this broad chop the market is currently seeing," he said. "No one wants to screw up their year on the last two weeks of trading, so I think we are seeing the normal year-end activity where we can't get any substantial follow-through."

IFR Energy Services analyst Tim Evans said that while the moderating weather picture seems to favor the bears, there are still some bullish factors propping futures up. "The natural gas and heating oil markets attempted to organize a rebound during the overnight Access trade, when market engineering generally faces less organized opposition, but by the opening the markets had fallen back, only tending to confirm the resistance overhead," said Evans. "The short-term temperature outlook continues to evolve in bearish fashion here, but Monday's performance was a reminder that there are still some supportive storage numbers coming down the pike before a more consistent bearish fundamental trend becomes possible."

Evans said the heating degree day accumulations for last week were higher than had been forecast, which prompted an upward revision of his withdrawal estimate for Thursday's natural gas storage report for the week ended Dec. 16 to the 165-175 Bcf level. "Forecast heating degree day accumulations for this week are nearly as high, suggesting perhaps 155-165 Bcf for the following weekly storage update," he added. "Each of these net withdrawals will run above the five-year average, further reducing the 107 Bcf year-on-five-year average surplus."

Despite the run of above average withdrawals, Evans said that by the end of the month it looks as if temperatures will run normal to above normal for most of the continental U.S. outside the Southeast. "Overall, we think the market will be heading into January with average storage, another month scratched off the heating season calendar and a big price premium that may be hard to sustain," he said.

Looking towards the Energy Information Administration's (EIA) natural gas storage report Thursday, some insiders are concerned that another 202 Bcf withdrawal could be revealed for the week ended Dec. 16, while most expect the number to be in the 160-180 Bcf range (see related story).

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