Following the old “buy the rumor, sell the event” trading mantra, natural gas futures tumbled lower Monday as sellers punished the market just as the coldest weather of the season was arriving in the eastern United States.

After shifting lower during the Sunday night/Monday morning overnight Access trading session, the January contract opened the holiday-abbreviated trading week 30 cents below Friday’s $7.457 settle. Continued selling battered the market in the morning session and pressed the spot month down to a $6.85 low at noon EST. Modest buying interest was seen in the afternoon and the January contract closed at $6.952, up a dime from its earlier low but down 50.5 cents on the day.

Though sizeable, Monday’s price slide only really served to equilibrate the market following an equally impressive price hike on Friday. The January contract erupted 45.7 cents or 7% Friday on forecasts calling for the coldest weather of the season for the East Coast. Even though those forecasts proved correct, the market was primed for a sell-off, sources agreed.

Also adding to the downward pressure on prices Monday was the latest round of medium-range forecasts, which call for a little end-of-the-year thaw. According to the eight to 14-day outlook released Monday by the National Weather Service, above normal temperatures are predicted for the eastern half of the country for the Dec. 28-Jan. 3 timeframe.

But don’t count on natural gas prices dropping significantly anytime soon, market watchers warn. “If you are short natural gas at this time of year you have to be pretty good at predicting a warming trend when the rest of the world doesn’t expect it,” said Bill O’Grady, vice president at AG Edwards in St. Louis. “The underlying issue in this market is that when there is an increase in demand and production capacity isn’t improving, you go up a vertical supply curve. The inelasticity of supply doesn’t send prices up proportionately, it sends them up exponentially.”

Sometimes, however, it is more revealing to look past the reasons why the market is short and focus on who is short, said Tom Saal of Commercial Brokerage Corp. in Miami. “[Non-commercial] speculators sold and the market rallied,” he said pointing to the Commitments of Traders (COT) Report for the week ending Dec. 14. “They lost money… Look for them to cover those shorts by buying back those positions.”

According to the COT data released by the CFTC Friday, the non-commercial segment of the market was net short 34,950 as of last Tuesday. Meanwhile, commercial traders were net long 1,143 positions. The remaining 33,807 long positions (34,950-1,143) were held by market participants in the non-reportable, small trader category, which is comprised of traders holding less than 175 open natural gas contracts.

Saal, who has studied the behavior of the non-commercial segment of the market on the price direction, points out that on only two other occasions have speculative accounts held such a large net-short position — in late January 2002 (-62,643) and then again in November 2003 (-52,684). In both instances, the natural gas futures market was in the process of carving out a bottom.

On Jan. 28, 2002 the prompt month notched a significant low at $1.85. In the subsequent months, the speculators would cover their positions and futures would nearly double in value by the end of March, 2002. History repeated itself again in November, 2003. After extending to a net short position of 52,648 on Nov. 18, 2003, the non-commercial traders were again heavy buyers, and successful in bidding the market from $4.55 to $7.55 in just three short weeks.

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