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Despite Near-Term Cold, Longer-Term Market Impact Seen Minimal; March Called Down 2 Cents

March natural gas is set to open 2 cents lower at $2.73 as hopes for market-moving cold continue to slip away. Overnight oil markets tumbled.

Analysts suggest the February outlook will not be cold enough to make a meaningful impact on supplies and once the withdrawal season ends, the market is likely to be staring sizeable storage builds in the face.

"The outlook for the weather in February continues to show a pattern of limited cold, suggesting a more moderate outlook for heating demand," said Teri Viswanath, director of natural gas trading strategy for BNP Paribas in a Wednesday morning note. "General guidance suggests a very stormy pattern along the East Coast, with expansive temperature differences between model forecasts due to tracks of these storms. Consequently, we expect that model volatility to continue as small changes in the path of a storm can result in large temperature differences. Overall, it still appears that the East Coast runs colder than normal, the West is above, and the Plains are caught in between, transitioning to the above-normal next week before dropping back below normal for the week of Feb. 16th."

The way Viswanath sees it, the market is content to deal with the relative certainty of large, incremental production increases at the expense of the uncertainty of end-of-winter temperature patterns.

"Extreme variability in the short-term weather forecasts has failed to inspire confidence that heating demand will sufficiently pare inventories this season. With the trend in prices for 2015 largely determined by the mostly uncertain heating demand ahead, the market instead has focused on the mostly certain aspect of supply-demand balances, which is the incremental growth in domestic production. In our opinion, the 4.5 Bcf/d of incremental winter production suggests that a significant inventory surplus will build by the end of March."

Natgasweather.com in a Wednesday morning report said it expects a pattern of continued pulses of cold air but questions just how much impact there will be on supplies and what kind of market impact may result. At this point tapping into any pool of cold, arctic air seems off the table. "So while we expect it will be active through mid-February with weather systems continuing to track across the country, more impressive blasts of Arctic air need to start showing up in the weather data, while also covering more U.S. territory for it to be significant.

"We don't think it's looking quite cold enough during mid-February to warrant a sustained and prolonged rally and expect any decent price strength will be viewed as an opportunity by big players to again short the markets."

Tom Saal, vice president at INTL FC Stone in Miami, said, "[Tuesday's] Market Profile was a double distribution trend day pattern [with a ] large price range. Key next-day strategy after a trend day is to 'fade' the opening to at least unchanged, [and it] looks like a lower opening is in the cards." That would mean buying the lower open for a quick trade as the market presumably moves back to unchanged, Saal explained.

In overnight Globex trading March crude oil fell $1.55 to $51.50/bbl and March RBOB gasoline skidded 3 cents to $1.5623/gal.

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