The apparent short-term correction in this bear market may have come to an end Monday as the January contract busted through and closed below Friday’s low, ending the day down a hefty 16 cents to $2.686/MMBtu. With very little in the way of bullish fundamentals available, other than some slightly chilly weather in northeastern markets, some observers see the potential for more sharp declines as the contract makes its way toward expiration next week.

“You can make the case that the price movement from early December’s low at $2.45 was basically an upward correction,” said Tim Evans of Thomson Global Markets. “We’ve had seven sessions and closed in positive territory in six out of the seven. As a working hypothesis, that’s an upward correction within a major down trend. The hypotheses for today’s price action is the correction is over and the down trend is resuming. It opened at $2.85, essentially even with Friday’s close, failed to make a higher high, took out Friday’s low at $2.72 and then closed below the low.”

It’s still hard to be “super confident” that the correction is over, however, just by virtue of how well this market has held together in spite of the last two storage reports, which were both clearly bearish, another observer said. It’s colder this week than last week. Weekly heating degree days accumulations are growing some, despite still being below normal. But at some point, the market might have to swallow the extremely bearish storage situation and prices will come tumbling down, he admitted.

A broker said that “as the January futures go into their death throws, we could see the bottom drop out. If you want to see an example of that, just look back on what happened to the December contract.

“It held support around $2.48 and rallied to as much as $2.91 — stop me if any of these numbers sound real familiar because they are pretty similar to what the January contract has done,” he said. “It came down in fairly orderly fashion to $2.53 and then on the last trading day, we went from having been up as high as $2.82 down to as low as $2.170 before settling at $2.316. I expect to see some sort of a replay of that with the January contract.”

You can pretty much write off the heating season right now, the broker said, predicting that the highest prices already have been seen this winter. “The last time we had this much storage and we also had a warmer than normal winter was in December 1998 and into the first quarter of 1999. What happened in that case was the near-by price fell to as low as $1.625 and the average for the first quarter was just a touch under $1.80, and we didn’t climb back above $2.10 until April 10. My question is what is so different this time that justifies a premium here. From a fundamental perspective, there is no reason why prices can’t fall to the $2 level, and it can happen very quickly.”

Storage is going to be another problem this week with market expectations focused around a withdrawal of 50-60 Bcf compared to 158 Bcf withdrawal during the same week last year. Last week, the American Gas Association reported a 22 Bcf withdrawal compared to 158 Bcf last year during the same week last year (two weeks in a row last year there were 158 Bcf draws). The comparisons don’t get any better after this. After the two weeks of 158 Bcf draws last year, there was a 175 Bcf draw and then 209 Bcf.

“Do we have a prayer of seeing anything similar? said Evans “The answer is no we don’t. Even if you forget last year and look at six years of prior AGA history, which includes several warmer than normal winters, it doesn’t get much better. The prior six year average (excluding 2000) for this week’s withdrawal from storage is 87 Bcf.”

Lehman Brothers analyst Thomas Driscoll said he’s expecting AGA to report a 60 Bcf withdrawal on Wednesday. Gas home heating degree days for last week were 155 versus 224 last year and 193 normally, he noted.

“We estimate that next week’s storage report will show a withdrawal of about 70 Bcf compared to a withdrawal of 175 Bcf a year ago,” said Driscoll. “NOAA estimates heating degree days of 165 versus 249 last year and 206 normally. We expect the year-over-year storage surplus to increase from 835 Bcf as of Dec. 7 to 933 Bcf (estimated withdrawal of 60 Bcf versus a withdrawal of 158 Bcf a year ago) for the week ended Dec. 14.”

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.