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Physical, Futures On Pre-Holiday Dive; Storage Drops February Into Sub-$3 Territory

Both physical and futures prices had the trajectory of a safe falling from a 10-story building in Wednesday's pre-holiday trading.

Gas for Thursday and Friday delivery fell at all but a couple of eastern points on New Year's Eve, and most locations were down by anywhere from 25 to 50 cents. The overall market skidded 38 cents to average $2.91. The greatest declines were seen at New England locations, but market zones across the country were deep in red ink.

Futures took a pounding as the Energy Information Administration (EIA) reported a thin 26 Bcf withdrawal, well under historical levels, but also smartly less than what traders were expecting. At the close, February had dropped 20.5 cents to $2.889, and March was off 20.0 cents to $2.896. February crude oil continued its losing ways falling 85 cents to $53.27/bbl, the lowest in more than five years.

Physical traders pushed prices lower and were more inclined to watch the power screen than follow weather reports. IntercontinentalExchange reported that peak power Friday at the ISO New England's Massachusetts Hub fell $14.77 to $49.50/MWh and power at the PJM West terminal dropped $5.98 to $33.93/MWh.

Gas at the Algonquin Citygates for Thursday and Friday fell $2.82 to $5.86, and deliveries to Iroquois Waddington dropped 15 cents to $3.53. Gas on Tennessee Zone 6 200 L fell $2.92 to $5.66.

In the Mid-Atlantic, gas bound for New York City on Transco Zone 6 fell 29 cents to $3.16, and gas on Tetco M-3 was seen 73 cents lower at $1.73.

Gas in the Rockies managed to hold on to a slight premium to Midwest Market Zones. Deliveries on CIG Mainline fell 40 cents to $3.12, and gas at the Cheyenne Hub shed 48 cents to $3.09. Gas at Opal changed hands 44 cents lower at $3.13, and deliveries on Northwest Pipeline Wyoming Pool dropped 41 cents to $3.09.

On Alliance, Thursday and Friday volumes fell 28 cents to $3.05, and gas at the Chicago Citygates came in 29 cents lower to $3.04. At the ANR Joliet Hub, gas was seen at $3.06, down by 29 cents, and on Consumers gas fell 28 cents to $3.04. Gas on Michcon lost 28 cents to $3.05.

The plunging prices came in spite of forecasts calling for some of the most brutal cold of the season. "The coldest weather since last winter will settle over the Upper Midwest and northern Plains and will have some people shivering as they say goodbye to 2014 and ring in the new year," said AccuWeather.com meteorologist Alex Sosnowski.

"While the core of the cold air will be centered over the northern Rockies and High Plains, temperatures will plunge well below zero from portions of the Dakotas and northern Minnesota at night through the end of 2014.

"[Wind chill] temperatures in some cases will be well below zero. Exposure to these temperatures for an extended period of time can lead to frostbite and hypothermia. A weak front dropping in along the Canada border may cause spotty flurries from parts of the Dakotas to Michigan and northern Ohio Wednesday night into New Year's Day. Any heavy lake-effect will be limited to part of the Upper Peninsula of Michigan through Friday. The exact track and timing of a storm from the Southwest will determine the extent of rain versus snow and ice over the region this weekend."

Futures took a broadside of their own in the form of an inventory report that showed a much leaner withdrawal than what traders were expecting. The Energy Information Administration (EIA) reported a decrease of 26 Bcf in its 12:00 p.m. EST release, about 14 Bcf less than estimates. February sank to a low of $2.987 after the number was released and by 12:15 a.m. February was trading at $3.032, down 6.2 cents from Tuesday's settlement.

Prior to the release of the data, analysts were looking for a decrease of about 40 Bcf. IAF Advisors analysts calculated a 30 Bcf decline, and Citi Futures Perspective analysts figured on a 43 Bcf pull. Ritterbusch and Associates was looking for a 48 Bcf withdrawal.

The price tumble was expected, but "a close below $3 is going to be necessary for a new price regime to stick," a New York floor trader said shortly after the storage report.

Tim Evans of Citi Futures Perspective said the reported "suggest[ed] either a further increase in production or a larger-than-anticipated drop in demand related to the Christmas holiday. It certainly reinforces the dominant bearish sentiment."

Inventories now stand at 3,220 Bcf and are 232 Bcf greater than last year and 81 Bcf below the five-year average. In the East Region 29 Bcf was withdrawn and the West Region saw inventories stay flat. Stocks in the Producing Region rose by 3 Bcf.

Wednesday's trading was dominated by the storage report, but all it took Tuesday to send the market a dime lower was a slight modification to the longer-term weather outlook. The National Weather Service (NWS) eight- to 14-day outlook showed slightly less cold and greater warmth from Monday's outlook. Monday's forecast showed a broad ridge of below-normal temperatures north of a line extending from Montana to as far south as Kansas and Missouri and east to Delaware. Above-normal readings were expected south of a broad arc extending from northern California to North Texas and including South Carolina.

"Tuesday's eight- to 14-day outlook moved the area of below-normal temperatures slightly to the north while the area of above-normal readings moved north as well," the forecaster said.

In spite of forecasts calling for expansive cold across the nation, the NWS forecasts below-normal heating loads for the week ending Jan. 3 in key population centers. In a report it said New England should see 242 heating degree days (HDD), or 30 below normal, and the Mid-Atlantic should endure 228 HDD, or 24 below normal. The greater Midwest from Ohio to Wisconsin is expected to shiver under 281 HDD, or five below its normal tally.

Analysts had a hard time predicting the storage figure. Tim Evans of Citi Futures Perspective said, "Our storage model produced a somewhat larger 43 Bcf net withdrawal estimate, although we see no sure advantage in anticipating a surprise from the DOE. The larger fundamental concern, in our view, is that we now no longer see the cooler than normal temperatures in the forecast as producing enough heating demand to full offset the apparent growth in natural gas production."

Evans figures show the year-on-five-year deficit contracting to just 54 Bcf by Jan. 16, and although he said the market "continues to become better supplied on a seasonally adjusted basis...at the same time, we do still see potential for prices to climb as heating demand picks up, translating into larger withdrawals in absolute terms, even though at a lower rate than past years."

Evans suggests working a buy stop at $3.23 in the February contract as a way to enter the market on the long side, and he counsels a protective sell stop at $2.97 to limit risk on the trade.

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