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Rescinding Early Advance, Bears Make It Two in a Row

Rescinding Early Advance, Bears Make It Two in a Row

After gapping higher at the opening bell, the natural gas futures market spent Tuesday's trading session in a methodical downward slog. With that the February contract completed its penultimate trading session at $5.716, down 1.1 cents for the day and 16.4 cents off its early-session high. The contract is set to expire at 2:30 p.m. EST Wednesday.

Some sources polled by NGI were surprised by the market's ability to funnel lower in the face of bullish short- and medium-range weather outlooks. Up to a foot of snow was expected to fall overnight Tuesday in the Northeastern United States courtesy of a fast-moving coastal storm. But that's only the half of it. Longer-lead outlooks issued by the National Weather Service continue to call for below normal temperatures for a protracted area of the Lower 48 states next week.

Natural gas is a weather-driven market in the winter, but Ed Kennedy of Commercial Brokerage in Miami is quick to note that winter futures go off the board at 2:30 p.m. EST Wednesday. "March is a spring month and the futures market will no longer be required to participate in weather-related spikes [this winter]." Kennedy goes on to note that the summer strip -- currently averaging roughly $5.20 -- is pretty pricey. "There is plenty of gas out there," he reasoned.

The idea that there is ample supply is not solely the view of Kennedy. After witnessing a string of lower-than-expected storage withdrawals over the past month, several market-watchers have re-calibrated their models for estimating the weekly storage draws. "This week's model has incorporated a new approach to modeling gas imports," said analyst Stephen Smith.

Specifically, Smith has ratcheted up his allowances for the impact of Canadian supply. "Historically, monthly Canadian imports have expanded to meet periods of cold weather in the U.S... Our theory [in December] was that perhaps Canadian imports had weakened, rather than expanded for the coldest weeks of December and early January and that this was likely the result of extremely bitter cold simultaneously in both the U.S. and Canada."

Having added back in a sizable supply allowance for gas from Canada (more gas from Canada results in smaller net U.S. withdrawals), Smith calculates that storage decreased by only 173 Bcf last week, versus a year-ago draw of 247 Bcf, a five-year average of 165 Bcf, and his 197 Bcf estimate for the week prior (when a scant 156 Bcf withdraw was estimated by the government).

In daily technicals, Kennedy eyes the downside in March futures and targets support at $5.55, $5.37 and $5.24.

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