Bearish Weather Overshadows Storage; Traders Take Profits

Natural gas traders wasted little time doing something Monday they have haven't done in a while --- they took profits. Following a string of four-straight advances, market makers wasted little time testing Wednesday's lows in the Sunday night access session and then again yesterday morning. The December contract was the hardest hit, shedding 20.9 cents to close at $6.368. Comparatively, the out months fared much better as traders rolled Dec longs into the summer strip and calendar year 2001, both of which finished in positive territory on the day.

Several trader were surprised by the market's downturn following an apparently bullish storage number that was released after the market closed Wednesday. According to the American Gas Association, 94 Bcf was withdrawn from underground storage facilities during the week ending Nov. 17, decreasing working gas levels to 2,648 Bcf or 80% full. Measured against last year's 20 Bcf draw-down and the five-year average of 52 Bcf, the report was bullish. In fact, not since 1997 when 108 Bcf was pulled from storage has the AGA recorded such a large withdrawal so early in the season. Expectations ahead of the report also failed to stack up, as traders were generally looking for a 50 to 100 Bcf withdrawal number.

However other traders were pleased with retracement that they felt was long overdue. In just three trading sessions the December contract erupted from a $5.625 low on Friday Nov. 17 to a $6.62 high on Wednesday Nov. 22. One possible explanation for the sell-off, several traders agreed, was the release of a fresh weather forecast Monday that calls for moderating temperatures for the first week of December. According to the National Weather Service, above-normal temperatures are expected to span a wide swath of the center of the country from the Ohio River Valley to just east of the Rocky Mountains. Meanwhile below-normal temperatures are expected in the extreme Northeast and Southwest regions of the country. That however, represents a major departure from the forecast of just a week ago that predicted below-normal temperatures across the entire country.

Based on the bearishness of that weather forecast, Susannah Hardesty of Indiana-based Energy Research and Trading looks for continued downward momentum on December's last trading day Tuesday. "This downside correction could continue through the expiration [December], and will most likely be the final downside move between the D2 and D3 peaks of the fall high. Best estimate for the downside support for December futures is at $6.00. Should that level break down, either in December or January futures, prices could continue to drop to $5.500 before completing the downside correction," she said.

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