Bearish Weather Trump Bullish Storage in Gas Pit

Feeding off losses achieved during the largest single day drop in Nymex history Tuesday, natural gas prices continued lower yesterday as bear traders looked past supportive storage numbers to focus on a warming trend expected later this week. The February contract was dealt the most severe blow, tumbling 17.5 cents to $8.189. Losses were far less pronounced in the out-months as evidenced by the 12-month strip, which only slipped 5.1 cents to 5.716.

According to the American Gas Association, 209 Bcf was pulled from the ground last week, leaving storage facilities with 1,729 Bcf, or just 53% full. Although that draw was well within the range of market expectations, it far outpaced historical comparisons with last year (133 Bcf) and the 5-year average (135 Bcf). Last week's withdrawal was also conspicuous because it represented the first time in the seven-year history of AGA data that storage has decreased by more than 200 Bcf during the month of December.

However, despite the wealth of bullish empirical data, February futures actually sifted lower after the report was announced yesterday. From its $8.53 peak reached moments before 2:00 p.m. (ET) the February contract tumbled more than 34 cents to its close yesterday.

Forecasts for moderating temperatures were central, to the continuation lower, sources agreed. For one Houston-based trader, the warming trend also explained the backwardized price hierarchy that has spot cash trading premium to January swing-swaps and also to February futures. Henry Hub cash prices for today's flow averaged $9.65, $1.46 more than the February settle.

Also causing some concern for market watchers is the fact that open interest declined by less than 500 positions or just 1% during Tuesday's 15% price erosion. One possible explanation, is that longs who entered the market in late October and early November when the market was still trading sub-$5.00, are still in the money, and thus hesitant to liquidate their positions. And any incremental selling they are doing is being met almost one-for-one by fresh short selling. The net effect of this situation, continued the trader, is that there could be some price stickiness to the downside until the end of the month, when those holding long positions are forced to either make delivery, or reverse their hedge.

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