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Futures Trickle Lower; Small Storage Withdrawal Expected

While natural gas futures continue to work lower, the declines are no longer in 50-cent increments. February natural gas chiseled out a new low for the move of $9.130 on Wednesday before settling at $9.238, down 9.8 cents.

Despite repeated attempts to rally over the past few session, bulls are finding no traction in the currently bearish fundamentals. "Natural gas futures continue to make lower lows, lower highs and lower closes," said Tom Saal of Commercial Brokerage Corp. in Miami. "That is a continuation of the current downtrend.

"I think this market keeps playing a broken record here. We are still looking for some weather to keep this market from slip-sliding away. Over the last couple of days, futures have tried to rally on technical features but, have found the going difficult. This time of year the weather is dominant. Without weather, it's hard for this market to get any positive movement, even with crude oil futures rallying." February crude climbed 57 cents on Wednesday to close at $63.94/bbl.

One factor supporting the spot February contract is the fact that traders are starting to cash in their chips. "We've got one fund [trader] who has made over $4 in his short February contract alone, and he is taking some off the table," said a New York fund broker. He added that there is no bullish information. "There are 50s in New York and no supportive weather on the horizon."

According to the trader, a number of funds were not only covering earlier shorts but initiating new short positions in the April and May contract. "The only area of bullishness is the crude and products. You've got to keep an eye on them," he said.

Saal said one thing that has been on his radar recently was the fact that the gas futures market has been trading significantly higher than the cash market over the last couple of weeks. "That is a signal for marginal storage operators -- people who don't have to follow a schedule -- to keep the gas in the ground," Saal said. "When there is a lack of weather and a lack of financial motivation to pull gas out of the ground, low withdrawals are sure to follow."

As a result, Saal said he expects Thursday morning's storage report for the week ended Jan. 6 to reveal a seasonably low withdrawal. "While we won't likely see another injection like last week, I think we will see a withdrawal of only 10 Bcf."

Estimates for the report this week appear to be a little scattered as industry players remain mystified by last week's 1 Bcf injection shocker. A Reuters survey of 20 industry players showed withdrawal estimates ranging from 10 to 60 Bcf, with the average prediction looking for a 25 Bcf pull.

Golden, CO-based Bentek Energy projects a storage withdrawal of 15 Bcf, which would result in 2,626 Bcf of gas in storage. "This level is 12% above the five-year average and 4.5% below the five-year high," Bentek said. The firm said it expects to see a 28 Bcf withdrawal from the East region, a 2 Bcf withdrawal in the West region and a 15 Bcf injection in the Producing region.

Wednesday afternoon's ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, zeroed in on a 20.6 Bcf withdrawal for the week.

Ron Denhardt, vice president with Strategic Energy & Economic Research Inc., said he is looking for a 25 Bcf withdrawal, which would be significantly lower than the 88 Bcf withdrawal last year and the five-year average pull of 184 Bcf.

"The weather outlook is very bearish through Jan. 23, 2006," Denhardt said. "Evidence of substantial demand reductions and mild weather has caused us to sharply lower our price outlook."

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