Giving futures market bulls quite a fright on Halloween, December natural gas took out support in the $12.68-70 area in Sunday's overnight Access trading session and kept the downward pressure in place during Monday's regular session. December ended up settling at $12.205, down 85 cents from Friday's close. Prompt-month futures haven't settled this low since Sept. 16, when October natural gas closed at $11.144.

With natural gas storage levels appearing adequate, no pending storm activity in the Gulf and moderate temperatures expected for the near term, lofty energy futures prices were forced to take a reality check Monday. After gapping lower 60.5 cents at $12.45, the natural gas prompt month continued lower to notch a $12.14 low for the day.

The downward move was seen across the energies Monday. December crude settled $1.46 lower at $59.76/bbl. December unleaded gasoline and December heating oil were also lower by 9.81 cents and 7.37 cents at $1.5261/gallon and $1.7698/gallon, respectively.

"With December natural gas futures at their lowest level since mid-September, a longer-term seasonal top looks like it has been established," said Tim Evans, an analyst with IFR Energy Services. "The short-term weather outlook with warmer-than-normal readings forecast into next week and no imminent storm threats in the Gulf of Mexico could keep pressure on the market for weeks to come in our view."

Evans said he is 100% short December natural gas from $13.70, with a buy stop at $13.62 to limit risk on the trade. "The bottom has dropped out of the market here, confirming a longer-term, seasonal top," he said. "We'd keep riding the trend and ignore any short-term oversold readings."

Advest Inc. broker Jay Levine said the complex is coming under continued selling pressure, amidst a back-drop of conflicting signs. "On the one hand, fundamentals aren't nearly as bullish as the market, or prices, would have you believe -- not exactly a new theme as it were -- with the technical picture not helping either..." he said. "That leaves the one factor which has helped propel if not maintain the current historic environment, which is to say psychology, which runs hot and cold depending on the day, much less the hour."

Levine's initial support level was around the $12.50 area. Following that, he said better support resides on either side of $12, with $11.25 up next.

As Monday showed, natural gas bulls may have a tough time this week. In a Bloomberg survey taken last week, ten of 18 traders and analysts, or 56%, expect Nymex futures to decline this week. Four respondents said prices will rise, and four predicted little change.

Just as Mother Nature dealt the bulls a winning hand in the form of ravaged Gulf production facilities from Katrina and Rita, she may now be trying to address the imbalance in the form of early mild weather at the onset of the heating season.

The National Weather Service forecasts that for the week ending Nov. 5, heating degree day (HDD) accumulations are expected to be well below normal for populous energy markets. The Mid-Atlantic states of New York, Pennsylvania and New Jersey are expected to see 84 HDD, or 42 below normal. The industrialized Midwest states of Ohio, Michigan, Illinois, Wisconsin, and Indiana are forecast to bank a nominal 83 HDD, or 57 below normal.

Early mild temperatures may be key to allowing storage inventories to build and provide sufficient gas this winter to offset Gulf production losses. The storage response to a cold front that passed through the Mid-Atlantic will be revealed in EIA's storage numbers reported this Thursday. For the week ended Oct. 29 the National Weather Service reported the Mid-Atlantic received 147 HDD, or 34 more than normal, and the Midwest shivered under 148 HDD, or 26 more than normal.

On Monday, the Minerals Management Service reported that shut-in Gulf gas production stood at 5.427 Bcf/d, or 54.27% of the Gulf's normal daily 10 Bcf/d in production. Shut-ins Monday were down ever so slightly from Friday's 5.504 Bcf/d figure. To date, 381.1 Bcf has been lost since late August in the aftermath of Hurricanes Katrina, Rita and Wilma. Total lost gas from the Gulf to date is equivalent to 10.442 % of the Gulf's yearly 3.65 Tcf output.

The balance between the first incursion of cold weather and impaired production facilities will be closely watched. "This week's numbers are going to be pretty important because we finally had some weather," said David Pursell, an analyst at Pickering Energy Partners in Houston.

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