Christmas came early for industrials, utilities and residential natural gas customers this year as futures traders late last week pressured prices to levels not seen since late November. Central to the sell-off was end-of-year book squaring mixed with contract liquidation ahead of moderating temperatures that were expected to invade portions of the country over the weekend and this week. The January contract was the hardest hit by the selling, dropping 64 cents for the day and $1.35 for the week to close at $12.283.

“Everyone I know has had a pretty good year, and they are taking their money off the table,” said Nymex local trader Eric Bolling. “The risk versus reward over these last few days is just not there. The volatility is too high. This is an end-of-the-year book squaring, pure and simple,” he told NGI Friday.

Sources were also quick to point to the weather as a bearish influence late last week. A Chicago-area source was melancholy Friday at the potential that his family’s annual ice hockey game would be rained out. “That is something we don’t usually get in Chicago in the winter,” he lamented. The mild weather was not confined to the upper Midwest however. Boston and New York were expected to see highs near 50 degrees Saturday and in Washington D.C. a springlike 56 degrees was the forecast high for the weekend.

Looking ahead, however, traders know that the natural gas market is extremely sensitive to changes in the weather forecast and market watchers will undoubtedly be focused on the latest forecasts available Tuesday morning. On Friday, the NWS outlook for the Dec. 31 – Jan. 6 period called for above-normal temperatures across a large swath of the U.S., including the entire West, Midwest, Great Lakes, and New England. Only the Southeast was forecast to see below normal temperatures, the NWS said.

With so much uncertainty surrounding the weather, market watchers were turning to technical trading strategies Friday. Instead of buying futures contracts outright, Bolling prefers to minimize his risk by simultaneously buying and selling sequential months at the Exchange. This practice — called spread trading — typically focuses on months that span across the two distinct seasons for natural gas: the storage withdrawal season and the storage injection season.

Specifically, Bolling charts and trades the March-April spread, which he feels is an excellent barometer of the market’s bullishness or bearishness. “That spread peaked at $3.95 (March 06 premium to April 06). On Wednesday it was $3.00; [Thursday] it lost 85 cents to trade down to $2.15. They really punished the winter,” he said.

This spread is a good indicator of the market’s appraisal of the winter and of the chance for higher prices. If the market prices March high relative to April, that is a bullish scenario. When march slips versus April, the market is losing its bullish conviction, he explained.

That said, Bolling is not terribly bearish following the drop. “The market put in some good work in the $12.00 area on the way up. I expect it to have some difficulty falling straight through that level. There is some support at $11.75 and $11.50. I think the market may trade back an forth around the $12.00 area while it waits [for its next price signal].”

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