March natural gas futures plummeted 60.1 cents Monday to settle at $7.226 as traders continue to discount pervasive cold weather throughout the East and Midwest while focusing on seasonal and technical factors.
The $7.226 close was near the bottom of the contract's trading range on Monday, which spanned from $7.190 to $7.480. Market experts warn that a number of factors are currently impacting futures. While near-term supportive weather and expectations of a significant storage withdrawal for the week ended Feb. 9 support the case of the bulls, recent struggles at getting above the psychological $8 level tied in with a moderating intermediate-term temperature picture gives the bears no shortage of ammo.
"There is no question that Monday's drop in natural gas futures was significant. Sixty cents in a day does get my attention," said Tim Evans, an analyst with Citigroup. "What that says to me is that the market is now that much more focused on the coming warming trend. When you look out into the 11-15-day period it looks like the Midwest and the East Coast are going to be warmer than normal and that will come on top of the seasonal warming trend, so we should see a significant drop in heating demand. The question is, how well the current forecast will hold up?"
While there is a forecasted warm-up, Evans warned that Thursday's storage withdrawal, which is expected to significantly exceed 200 Bcf, could combat the bearish sentiment. "How well can traders block out the storage data because come Thursday, we are going to have a shot at the 260 Bcf all-time record weekly storage withdrawal for the week ended Jan. 17, 1997. My ballpark guess is for a withdrawal of 250 to 260 Bcf. Record or not, it is going to be a big number.
"In a way, it is an extreme case of what the market does all of the time," Evans added. "The market constantly wrestles with whether to look back at the recent storage data or ahead to the temperature forecast. It is one thing when we think the year-on-five-year average surplus might decline by 20 Bcf for the week, while it is entirely another thing to see a 100 Bcf drop in the year-on-five-year surplus. I am short the market here, but I am nervous."
Market technicians suggest that the probabilities of a bullish move higher for the struggling March futures contract is slim. "In the 16 complete years of trading (natural gas futures) 1991 through 2006 there have been only three years with a strong February rally -- 1993, 2002 and 2003," noted Walter Zimmerman of United Energy. "When we see possible peaking action coming into February we take it seriously, and the bulls have to be disappointed that the extreme cold produced a peaking action."
Top traders are more than willing to concede a wide range of seemingly bullish factors in play. "This week's storage number is expected to draw more than 200 Bcf again and will cut into the excess storage," says Mike DeVooght, president of Devo Capital. He also acknowledged that colder weather forecasted for this week continues to support prices, but temperatures for the following week should be warming up, and "will remain below average for the key consuming areas in the Midwest and Northeast. On a trading basis, we continue to hold our short summer and winter strip positions."
DeVooght currently advises trading clients to hold short a spread position of short March crude oil and long March natural gas. End-users should stand aside, he said, and producers should hold short 25% of winter 2006-2007 production hedged earlier at $11.95, and hold a short April-October strip for 25%. For summer production, he advises producers to continue holding a short summer strip at $7.60 for 50% and also a short winter 2007-2008 strip at $9.00 for 15% of production.
It's hard to deny what should be supportive near-term weather. AccuWeather reports a storm set to slide past the Midwest after strengthening over the southern Plains. "The clash of frigid air to the north and warm and moist air from the south will allow the storm to gain strength over Texas Monday. To the north, the storm has already caused some snow to break out over the northern High Plains," said AccuWeather's Kristina Baker. She added that rain is spreading into the central Plains, and as this wet weather meets colder air to the north, watch for freezing rain and sleet from northern Kansas to central Illinois.
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