Futures Fizzle Despite Undeniable Fundamental Strength

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

A cash trader was quick to point to cash prices, which tumbled by more than a dollar despite the coldest weather yet this season, as a reason for the futures price erosion. Specifically, he was aware of heavy selling by at-risk southeast storage operators who were selling prompt cash and buying January futures for a profit of 40-60 cents. "Can you blame them for wanting to sell their storage gas at these prices?" he asked. Another price bearish phenomenon he has witnessed over the two-day, $1.876 price slide is the emergence of heavy (and in some cases mandatory) fuel switching by dual-fuel Northeast utilities. Taken in concert these two market factors have led 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 at work yesterday, was the psychological effect of the market moving lower despite the storage-weather one-two combo. For most areas of the country, Wednesday was expected to be chilliest day of the cold snap as temperatures are expected to moderate slightly into the weekend. Add to that the announcement of an expected large storage withdrawal and bulls were looking for great things Wednesday.

According to the American Gas Association, 158 Bcf was pulled from underground storage facilities last week, bringing working totals to 2,271 Bcf, or 69% full. Although the withdrawal fell neatly within the 140-170 Bcf range of market expectations, it more than doubled last week's withdrawal.

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

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

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