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Futures Continue Free Fall, Threaten to Break Below $7

As temperatures in a number of major natural gas markets continue to moderate following the East's cold and stormy weekend, March natural gas futures continued the move lower Tuesday, carving out a new low of $7.055 before going on to settle at $7.114, down 12.9 cents for the day.

Tuesday's action made the decline streak seven trading days. Since Feb. 3, prompt-month natural gas has dropped $1.499 uninterrupted. March natural gas only managed a high of $7.240 on Tuesday.

"The winter weather we got this past weekend couldn't even prop this market up because ultimately it is expected to warm right back up," said Steve Blair, a broker with Rafferty Technical Research in New York. "Forecasters are saying the New York/New Jersey area is going to be back up around 60 degrees in the next few days. I think the market is saying that we are in the middle of February and natural gas storage is more than ample. The market really seems to be comfortable with the fundamentals."

Blair said he thinks the March contract will likely penetrate below $7, but he noted that there are some "pretty good" support numbers around $6.90. "Everyone originally thought the $8 level would hold and now we are assaulting $7," he said. "I wouldn't be surprised if we break below $7, but I just don't think it will go much lower. I certainly don't think it will bust under $6. That would shock me."

He added that while natural gas is still trading at a discount to crude and heating oil, at least crude and heating oil are now heading lower with natural gas. March crude and March heating oil continued their declines Tuesday. Crude settled $1.67 lower at $59.57/bbl, while heating oil dropped 2.86 cents to close at $1.61/gallon.

Mild weather continues to pummel the natural gas market. The National Weather Service forecasted that the week ending Feb.18 will see a below normal accumulation of heating degree days (HDD) for populous energy markets. New York, New Jersey, and Pennsylvania are predicted to see 227 HDD, or 20 below mid-February norms and Ohio, Michigan, Indiana, Illinois and Wisconsin are expected to endure 248 HDD, or 18 fewer than normal.

Top traders see no reason for natural gas futures to bounce. The unsupportive weather and Katrina-Rita driven demand destruction continue to extinguish hopes for any substantive rally. "One of the big factors that has been supporting the [natural] gas market" was strong distillate and crude oil prices, which were "yanked out from under the market these past weeks when the complex started to fall," says Mike DeVooght, president of DEVO Capital Management, a Colorado risk management and consulting firm. "On a trading basis, we see no reason that gas prices will not continue to work lower in the weeks to come. We will continue to hold all current positions." However, DeVooght cautioned that the Btu discount enjoyed by natural gas relative to heating oil and crude oil may eventually support the price of natural gas.

DeVooght is currently advising trading clients to hold a long April natural gas and short crude oil spread position (10 contracts of crude oil versus six natural gas contracts). He's telling end-users to stand aside. For natural gas producers he advises holding the remaining short futures positions comprising 30 to 50% of winter 2006 production at $13.95. He also advises holding March $7 put options and selling a $9.50 call at even money and holding a short winter 2006-2007 strip at $11.60 for 25% of production.

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