Realizing that bulls had spent all their bullets, bears hadtheir way at Nymex for the second-straight session Wednesday asthey took prices lower in several selling waves. Not even amid-morning rally could dissuade traders from continuing to takeprofits following the market’s precipitous spike to $9.65 earlierin the week. As a result, the January contract was left to slumplower for much of the afternoon, finishing 60.8 cents lower at$7.537.

A cash trader was quick to point to cash prices, which tumbledby more than a dollar despite the coldest weather yet this season,as a reason for the futures price erosion. Specifically, he wasaware of heavy selling by at-risk southeast storage operators whowere selling prompt cash and buying January futures for a profit of40-60 cents. “Can you blame them for wanting to sell their storagegas at these prices?” he asked. Another price bearish phenomenon hehas witnessed over the two-day, $1.876 price slide is the emergenceof heavy (and in some cases mandatory) fuel switching by dual-fuelNortheast utilities. Taken in concert these two market factors haveled to a glut of supply in the Southeast and nowhere for it to go,the trader continued.

However, possibly more crippling than the economic factors atwork yesterday, was the psychological effect of the market movinglower despite the storage-weather one-two combo. For most areas ofthe country, Wednesday was expected to be chilliest day of the coldsnap as temperatures are expected to moderate slightly into theweekend. Add to that the announcement of an expected large storagewithdrawal and bulls were looking for great things Wednesday.

According to the American Gas Association, 158 Bcf was pulledfrom underground storage facilities last week, bringing workingtotals to 2,271 Bcf, or 69% full. Although the withdrawal fellneatly within the 140-170 Bcf range of market expectations, it morethan doubled last week’s withdrawal.

Looking ahead, several market watchers and brokers were advisingtheir producer clients to lock in some profits at current pricelevels by selling the 12-month strip. And it is that sort ofselling that could break this market’s back, warned a Houston-basedrisk manager. “That type of selling will likely be done not withNymex, but rather with market makers such as EnronOnline andDynegydirect. And they can’t shoulder the burden on their own..Eventually, they will have to lay off some of their risk by sellingfutures in the pit. The price spiral could really get going then,”he warned.

However, Tim Evans of New York-based IFR Pegasus is unwilling toforget the fundamental side of the market quite yet and points topotential storage shortfalls heading into the spring. “With belownormal temperature this week, we see this [588 Bcf year-on-year]shortfall expanding in next week’s data by perhaps another 40-50Bcf. From that point, even if the weather is warmer than in thesame week a year ago, we think it will prove a major accomplishmentjust to get the deficit back down to the current level. Last springwe bottomed at 1,008 Bcf, implying that a match of last year’sstorage pattern going forward would leave us with just 420 Bcf onhand at the end of the winter. We hardly consider that a bearishfactor,” he wrote in his daily Pegasus NatGas Report.

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