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Futures Drop 31.4 Cents as Lack of Weather Remains Key Driver

After January natural gas futures failed to stay below the psychological $7 level on Tuesday, traders made sure the move to sub-$7 levels stuck on Wednesday. The contract spiraled to a low of $6.760 before settling at $6.769, down a significant 31.4 cents on the day.

"I think this move lower is technical in nature," said Steve Blair, a broker with Rafferty Technical Research. "On Tuesday we broke down when we got under major support at $7.18. Our next support was $6.81 and we got below that on Wednesday. The next level of support is down at $6.61. Obviously storage on Thursday could change all that if we get a surprise, but we will have to see how that plays out."

The moderate weather picture going forward combined with expectations of a smallish storage withdrawal allowed bears to continue to apply downward pressure to near-month futures Wednesday. "We still have slack demand," said Ed Kennedy, a broker with Commercial Brokerage Corp. in Miami. "Right now cash is weak and futures are weak. The real question is whether we are going to get a return to more seasonable temperatures next week."

He noted that while there appears to be the possibility of some cold next week, it might not be enough. "We have this first cold impulse coming across heading towards Lake Superior, which is giving snow to Denver right now," Kennedy said. "We have a second cold pulse that is likely to head up the western slope of the Appalachian Mountains. When the second one is finished, it could usher in the colder air. Tune in next week to find out."

Mulling over the current price level, Kennedy noted that $6.720 looks like it could offer pretty decent support. "Below $6.72, I don't think we can get much below $6.50," he added.

Looking at Thursday's natural gas storage report for the week ended Dec. 15, the broker said the only thing that was important about the report was that its release at 10:30 a.m. EST would probably mark the close for the week from a business standpoint. "Right after the storage report hits in the morning, everyone is going to start leaving the [trading] floor," Kennedy said. "They won't return until Tuesday."

Top analysts say that if prices are going to improve, demand will have to increase. "We are not yet seeing any major changes suggestive of a sharp upswing in consumption," said Jim Ritterbusch of Ritterbusch and Associates. He noted that spot market buyers are already "scrambling to reduce inventories rather than save product for peak winter needs."

With a falling cash price the incentive to buy the physical gas, store it and sell futures at a hefty premium is enhanced. Normally that would slow withdrawals from inventory, but "we would reiterate that inventory throughout the distribution system will be becoming a hot potato during the coming weeks as the bearish combo of large supplies and weak demand restricts upside progress in the spot markets," said Ritterbusch.

If the forecasts of the National Weather Service (NWS) are any guide, weather-driven demand is not likely to increase in the immediate future. The NWS forecasts below normal accumulations of heating degree days (HDD) for the current week in major energy markets. For New York, New Jersey and Pennsylvania, 170 HDD are predicted, or 65 below normal. Ohio, Pennsylvania, Michigan, Ohio, Illinois and Wisconsin are expected to see 189 HDD, or 78 below a normal tally. For the "heating" season, which began Nov. 1, the NWS says the Mid-Atlantic states above are a whopping 239 HDD below normal at 1,434 while the Midwest is just nine off a normal pace at 1,875 HDD.

Private forecasters agree on the short-term forecast, but suggest cooler temperatures next week. "A storm will produce its own cool air across the nation's midsection for the next few days, but still no true arctic air will be invading the Lower 48 for the rest of this week, the holiday weekend and into early next week," said meteorologist John Dee. He added that further out "there are signs that the main polar jetstream will finally drop south from its position in central Canada and sit across the northern U.S. by later next week."

That cold weather may be enough to rescue January futures from falling still further. According to Ritterbusch, if "weather doesn't come to the rescue," January futures are likely to slide to the $6.55 to $6.75 area by next week's January contract expiration on Dec. 27.

Looking closer at Thursday's storage report, a Reuters survey of 21 industry players was looking for an average 62 Bcf withdrawal, while the ICAP storage options auction Wednesday revealed a consensus withdrawal of 73 Bcf.

Golden, CO-based Bentek Energy's Flow model indicates a withdrawal of 68 Bcf, which the company points out would leave stocks exceeding the five-year high for the first time since the week of Jan.13. Bentek's Supply/Demand Balance model projects a withdrawal of 110 Bcf. The Flow model projects a 43 Bcf withdrawal in the East region, a 19 Bcf withdrawal in the Producing region and a 6 Bcf withdrawal in the West region.

The number revealed Thursday morning will also be compared to last year's 168 Bcf pull and the five-year average withdrawal of 121 Bcf.

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