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Trading is Lackluster as Futures Settle Pennies Lower

After trading within one of its smallest ranges in months, February natural gas futures on Tuesday basically called the day a wash, settling 2.4 cents lower at $9.336. Trading flip-flopped from gains to losses for a majority of the session while remaining within a tight 27-cent range from $9.280 to $9.550.

"Trading on Tuesday was more of a break in the action than anything else," said Tim Evans, an analyst with IFR Energy Services in New York. "The range was fully inside of Monday's range and I think traders used it as a chance to perform triage."

Evans said that while the market's actions are interesting, what is really "remarkable" is what it is not doing. "This market can't even pull together a short-term technical swing to the upside," Evans told NGI. "It is pretty sad when you drop over $6 and you can't bounce more than 20 cents on any given day. There is no credible fundamental reason for this thing to jump and I think that is what we are seeing."

The analyst noted that the current winter timeframe and the lack of cold weather is also of great interest (see related story). "If you make it through January without any real periods of cold, it becomes that much more difficult to really create a bullish panic," he said. "If after January you only have cold, but not low storage inventory levels, it is easy for the market to be complacent. In percentage terms, the month of January is a third of winter. It really is a major weather turning point."

As for the market's direction in the near term, Evans noted that "the trend is your friend." He added that the last couple of months have been a real textbook lesson as far as oscillators such as the Relative Strength Index and Stochastics. "This market got extremely overbought but it kept going up," he said. "Now it is oversold but it still appears to be in a stable downtrend."

Working gas inventories are predicted to end January near record highs. "The temperature forecasts indicate that withdrawals will remain very meager in coming weeks and while still probably falling short of record January levels, storage levels at the end of January 2006 will probably be the second highest on record," said Citigroup's Kyle Cooper. His initial estimate for the week ended Jan. 6 is for a withdrawal in the "lower 30 Bcf range."

According to EIA data, inventories stood at 2,509 Bcf at the end of January 1989. Last week's surprise report of a 1 Bcf injection left inventories as of Dec.30 at 2,641 Bcf. Spot futures traded as low as $1.85 on Jan. 28, 2002 when inventories reached a robust 2,344 Bcf.

The Commodity Futures Trading Commission (CFTC) reported Friday that noncommercials still held a sizable net short (futures only) position while "non reportable" positions, typically small speculators, held an almost equally opposite net long position. The CFTC said that as of Jan. 3 noncommercials held a 43,904 net short position, while the non-reportable position was 40,098 net long.

These data can cut in one of two ways. Should prices move higher, the noncommercial traders may be forced to cover their shorts, propelling prices even higher. However, should prices continue to trickle lower, these smaller speculators (non-reportable positions), who are typically not as well capitalized and thus more susceptible to margin calls, would be forced to liquidate their longs. This market action could drive prices even lower.

These small speculators may be listening to technicians. According to Lannie Cohen, president of Capitol Commodity Services Inc. of Indianapolis, natural gas prices may have reached a bottom. He bases his analysis on his interpretation of the February bar chart. "It could hold here and then start heading back up,'' Cohen said Monday. "[Monday's] low is good, solid support." He added that the $8.91 to $9.15 range will trigger buying, based on price points that previously served as resistance.

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