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Cash Weakens; Futures Trader Sees Selling Opportunity

Physical natural gas for delivery Wednesday and Thursday overall fell sharply in Tuesday's trading as traders scaled back purchases ahead of the Christmas holiday, though much of the decline came at four capacity-constrained points in New England.

Losses were broad and far-reaching, and only a handful of points made it to the positive side of the trading ledger. Locations in the Northeast showed multi-dollar losses, but in the Mid-Atlantic prices were mixed. Gulf Coast points weakened as well. Futures traded lower on very light and insignificant volume. January fell 4.7 cents to $4.416, and February lost 5.0 cents to $4.469. February crude oil added 31 cents to $99.22/bbl.

New England points suffered the greatest declines as temperatures were expected to snap back from a Christmas day drop to normal levels. AccuWeather.com said Tuesday's high in Boston was forecast to slide to 26 degrees Wednesday before making it back to 37 on Thursday, just one degree off the seasonal norm. New York City's Tuesday high of 41 was predicted to drop to 29 Christmas Day before jumping back to 41 on Thursday. The normal high in New York for late December is 41. Philadelphia's Tuesday max of 42 was expected to slide to 31 Wednesday before rising to 42 on Thursday, the seasonal norm.

Declining power loads offered little incentive to power generators to step up purchases of natural gas for power generation. The New England Independent System Operator said Tuesday's peak load of 17,580 MW was forecast to fall to 16,310 MW Wednesday before recovering to 18,800 MW Thursday.

The National Weather Service in New York City said on Tuesday, "a cold front moves through the region this evening followed by Canadian high pressure for Christmas. A weak cold front moves across the region Thursday followed by more high pressure building in from the south and west through the weekend. A strong cold front moves across the region late Sunday into Monday."

Quotes at the Algonquin Citygates for Wednesday and Thursday gas fell $6.20 to $7.59, and gas upstream at Iroquois Waddington dropped $1.24 to $5.32. On Tennessee Zone 6 200 L packages tumbled $5.60 to $8.40.

To the south quotes at Mid-Atlantic locations were mixed. Deliveries Wednesday and Thursday to Transco-Leidy fell 27 cents to $3.05, but packages at Dominion rose 2 cents to $3.57. Gas on Tetco M-3 was off 12 cents to $4.33, but gas headed for New York City on Transco Zone 6 was up by 2 cents to $4.66.

Prices at Gulf locations were generally lower. Gas on ANR SE came in at $4.36, down 7 cents, and at the Henry Hub Wednesday, Thursday packages were seen at $4.46, down 6 cents. On Tennessee 500 L gas fell 7 cents to $4.38, and on Columbia Gulf Mainline gas changed hands at $4.35, down 10 cents. Deliveries to Tetco E LA added 5 cents to $4.39.

In spite of the futures loss of nearly a nickel, traders saw little significance to the day's shortened session. "We have only 22,000 contracts traded in the January and 28,000 in the February at mid-session. Today is a sleeper," said a New York floor trader. He added that the day's decline was not meaningful since "it wasn't off any kind of volume. I don't think Thursday will be any different. It is a London trading holiday."

Weather forecasts moderated somewhat overnight Monday. WSI Corp. in its 11- to 15-day outlook showed below-normal temperatures north of a sinuous arc extending from Minnesota to Alabama to North Carolina. "[Tuesday's] forecast is a bit milder in the central U.S., especially on days 11-12, [and] forecast confidence has fallen a notch today with indications that a highly changeable, volatile pattern will continue.

"Though the hemispheric pattern has changed little today and still favors cold in the central and east, there is likely to be another surge of milder temps early in the period over the central U.S. ahead of the next arctic front which drops down late."

Top traders acknowledge the recent weather-driven price advance, but longer term they don't see current prices holding. "All of the natural gas demand we are seeing is short term and seasonal weather-related, and even though that can't be ignored, we still feel that natural gas production is strong and is growing," said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm. "After the shorts get done covering and temperatures warm up, it is going to be difficult for the natural gas market to hold above the mid $4 level. On a trading basis, we would use the recent rallies as a selling opportunity."

DeVooght advises trading accounts to continue to hold short February $4.50 calls initiated at 20 cents and to also stay short March futures at $4.40 to $4.50. End-users are counseled to stand aside, and producers and those with exposure to lower prices should maintain the balance of a short November-March strip from $4.50 to $4.60 and sell the April-October strip at $4.30 to 4.40.

Technical traders note the case for a completed five-wave advance off the $3.379 low and the accompanying divergence on the short term MACD (moving average convergence divergence) and RSI (relative strength indicator) readings. If that is the case, the groundwork could be in place for steady, if not lower prices. "While the technicals appear bearish, there has been no actual rollover to a bearish bias," said Brian LaRose, a technical analyst with United-ICAP. "On top of that, key support has not been broken. Bears will need to get below $4.201-4.155-4.092 to suggest a top is in place."

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