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Futures Still Range-Bound as Traders Grapple with Weather

With conflicting weather forecasts and uncertainty over Thursday's storage report, traders on Wednesday appeared content to let the range-bound market remain range-bound. Following another failure just above $8, December natural gas drifted lower, ultimately closing at $7.823, up 6.8 cents from Tuesday's close.

The $8.040 high from Wednesday marked the third time in the last seven days that the prompt month has been rebuffed from the $8-plus level. Last Thursday and Friday, December natural gas put in highs of $8.020 and $8.050, respectively, sparking selling both times.

"We have definitely been range-trading here for the last couple of days. We got back up above $8 on Wednesday and in came the selling just like the previous times," said Ed Kennedy, a broker with Commercial Brokerage Corp. in Miami. "We have also seen that when we get down in the low $7s, in comes the buying. We appear to be stuck here for the time being until we see what kind of temperatures turn up next week."

While some people are still focused on this week's warmth, the broker said the potential for some real cold could be right around the corner. "Some of the independent forecasters are saying the air that is coming down into the states next week is going to be truly arctic air, which totally busts the forecast from the National Weather Service (NWS).

According to the NWS's latest six-to-10-day forecast, which covers Nov. 14-18, most of the country is expected to experience normal temperatures for this time of year with the exception of North Dakota, South Dakota and Montana in the North Central region and Alabama, Mississippi, Tennessee and Kentucky in the Southeast, which are expected to be colder than normal. A large portion of the Southwest and Northeast are expected to experience above normal temperatures during that time.

"I don't think we are really going to respond to the independent cold weather forecasts until the beginning of next week when we can see if it verifies," Kennedy added. "If it is truly arctic air, the cash market is going to take off like a bat out of hell and futures will respond, because utilities are not going to pull from storage early at the expense of reliability of supply in December, January and February."

Traders need no other reason to explain the current volatile and trendless trading in natural gas futures than to look at the unpredictability of weather reports. In Tuesday's trading, December futures opened 11 cents lower at $7.380 only to close at $7.755, up 26.5 cents on the day.

"After plunging in early trade [Tuesday] the natural gas soared after the Global Forecast system at the U.S. National Center for Environmental Prediction lowered their temperature forecast by 7-10 degrees from 24 hours earlier," noted Phil Flynn of Alaron Trading in Chicago. This comes at the same time that they reported that the nation had near or below normal temperatures in all regions of the country in October, which made the month the 52nd coolest October on record, Flynn noted. The last time that all regions of the country had no areas above normal was February 2003. "Is that a sign that we are headed for a long cold winter?" he queried.

Flynn likened the few-degree change in the weather forecast to "six degrees of separation" differentiating the natural gas futures from a raging bull market and a failing bear market "[Tuesday], just a few degrees of separation rebounded the sagging natural gas market," he noted.

The time frame for the seven-to-10-degree temperature change wasn't specified, but in the short run AccuWeather predicts above normal temperatures for a majority of the country over the rest of the week. The forecaster said that east of a broad arc extending from western Montana to central California the entire U.S. is expected to be above normal. The remainder of the country west of the arc is expected to be normal.

Traders have now turned their attention to the Energy Information Administration's (EIA) storage report Thursday morning for the week ended Nov. 3. It appears that the industry will see a withdrawal, but it will likely be smaller than the previous week's 9 Bcf pull. A Reuters survey of 22 industry players found that the average expectation is for a 4 Bcf withdrawal, while the ICAP derivatives auction held Wednesday afternoon showed a consensus pull of 1 Bcf.

After last week's early withdrawal, Golden, CO-based Bentek Energy also projects a 1 Bcf withdrawal, which would result in 3,451 Bcf of gas in storage. "This level is still 7.9% above the five-year average and 3.5% over the five-year high," Bentek said.

The company is expecting a 7 Bcf withdrawal in the East region, a 6 Bcf injection in the Producing region and no change in the West region.

Any type of withdrawal would be considered bullish when compared to historical data sets for the week. According to the EIA, last year's report for the similar week revealed a 56 Bcf injection, while the five-year average for the similar week is an injection of 23 Bcf.

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