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January Natural Gas Futures Fall as December Temps Rise

January natural gas futures explored lower price levels Monday as the cold snap of weather from the previous week dissipated as forecast, leading traders to focus on the prospect of burdensome supplies at the end of the heating season. After putting in a low of $7.220, the prompt month rebounded to close at $7.427, down 13.4 cents from Friday's close.

"I think the traders really beat up natural gas futures here because of the moderating weather picture. That's all there really was out there Monday," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "They may have overdone the selling initially, so that is why we saw the short-covering rally in the afternoon. Basically that is it."

Looking at support lines, the broker noted that the $7.250 area shows up as pretty good support, but that it doesn't stand a chance of holding as the mercury rises this week in key gas-demand regions. "This lack of winter weather is going to allow this market to continue to grind lower," he said. "However, if the warmer forecast falters at all, a rally will soon ensue. Have you ever known a forecast to be wrong?"

As for advice in the current market, Saal said buyers should wait it out while producers should sell rallies -- at least in the winter months. "Now that we have had this sell-off, producers will probably need to wait for the next rally," he said. "We will get that next rally when we get the next modification to the weather forecast. Next month is when the storage situation really comes in and plays a key role. Right now, the producers are probably hoarding inventories."

Prime energy markets in the Midwest are expected to see mild temperatures and rain. The Weather Channel predicts light rain or drizzle in the Mississippi River Valley into southern Lower Michigan, with freezing drizzle possible in northern Minnesota, northern Wisconsin, and the Upper Peninsula of Michigan. Rain is expected to become more widespread on Tuesday across the region. "Temperatures are expected to remain well above seasonal averages again [Monday] and throughout the week ahead," the forecaster said.

The National Weather Service in its most recent six-to-10-day forecast (Dec. 17-21) shows above normal temperatures east of a line extending from the Texas border with New Mexico up through the center of North Dakota. The states of Oregon, Washington, California, Nevada, Arizona and a part of Utah are expected to experience below normal temperatures for the period.

Traders look for steady prices. According to a Bloomberg survey of 18 traders and analysts, eight, or 44%, expect natural gas prices will be steady this week. Six said prices will fall and four expected a gain.

Following the action last week, risk managers are looking for lower western prices, if not Henry Hub as well. "It was a relatively quiet week on the news front, for the weekly storage number came in as expected and the forecast for warmer temperatures on the way was not changed," says Mike DeVooght, president DEVO Capital Management, a Colorado trading and risk management firm. "It seemed that the big action was in the basis trade..., especially in the Rockies. The Rockies basis has crumbled the past two weeks, with late summer and early next winter gas trading at close to a $3.00 discount to the Nymex.

"We tend to think there is a good chance the weak basis trade is pointing the way for the exchange-traded gas." DeVooght advised end users to stand aside and producers to hold short an earlier hedge position of short 25% of winter 2006-2007 production established earlier at $11.95 and to maintain a new short April-October summer strip at $8.00.

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