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Longer-Term Weather, Storage Uncertainty Pummel February Futures

The February futures contract plunged while going off the board Monday, taking a sharp 25.8-cent swan dive to settle at $6.917 after having posted a $7.33 high around 11 a.m. March ended the day down 22.1 cents at $6.937. Despite the severe cold across much of the nation, there remains significant uncertainty over longer-term weather forecasts and what may happen to the large storage surplus.

Several sources said many were expecting buy orders to enter the market late in the session during the settlement period Monday because of the continuing cold weather, but when they didn't materialize there was a major sell-off. Others also speculated that some large commercials may have decided to make delivery on their higher-priced futures positions rather than buy out of their contracts.

"I had a lot of people telling me that overall the February market was short and there would be some buying coming in, but it just wasn't there," said Steve Blair of Rafferty Technical Research. "That perception apparently was wrong, and when that was realized, it just collapsed."

Tim Evans of Citigroup said a major part of the story Monday was that those who were positioned on the long side of the market simply ran out of time. "It does raise some questions about whether this cold, as impressive as it is, maybe is too little, too late," he said. "The six- to 10-day outlook is pretty impressive. The heating-degree-day accumulations next week are expected to be another step up in terms of heating demand, even compared to this week. It looks like the coldest week yet."

The National Weather Service's (NWS) six- to 10-day forecast still shows below normal temperatures across the bulk of the nation except for the Southwestern corner and California.

"The bigger issue is what else are we going to get," said Evans. "The answer to that one appears to be 'not much.' It looks like we may still get some below-normal temperatures in the Northeast after next week, but the warmth in the West could be an offset to that."

In the NWS's eight- to 14-day outlook, the area of below normal temperatures is significantly smaller and less certain but covers most of the eastern half of the nation, particularly the Midwest, Northeast and South Atlantic. The area of above-normal temperatures grows to cover much of the West.

Another broker said the afternoon price plunge Monday seemed to take everyone by surprise because the cash market was so strong in the morning. "Henry Hub was trading a couple cents above futures earlier in the day. I would have thought it would have kicked up a bit. I was also surprised because we should get pretty hefty withdrawals from storage this week and next week.

"But that may still leave us above year-ago levels, and therein may be the rub."

Looking at the storage outlook, there could be three consecutive weeks of withdrawals near 200 Bcf, said Evans. "It's going to be hard for the market to sustain a downtrend if we have three big withdrawals about to be reported," he said. "I think there is enough heating demand that the March contract will collect itself and move higher. We have to wait and see if the weakness was expiration-related or if there really was a loss of bullish sentiment."

It's supposed to be very cold in January and February with strong storage draws, but in a normal winter there would have been some scattered cold in the months leading up to the coldest period, and that just wasn't there in the major population centers in the East and Midwest. January and February can't carry the load alone. Possibly if lower than average temps carried strongly into the spring, then the storage overload could be dissipated, but that's an unknown.

Gas storage levels currently are 10% above levels last year and 21% above the five-year average. There was 2,757 Bcf of working gas in storage on Jan. 19, which was 251 Bcf more than the same time last year and 472 Bcf more than the five-year average. About 164 Bcf/week needs to be withdrawn over the next three weeks for working gas levels to drop to where they were at the same time last year (2,266 Bcf on Feb. 10, 2006). However, working gas levels last year were much above normal and ended the withdrawal season at a record high.

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