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Colder Forecast Fails to Halt Futures Slide; Gas Leads Oil Down

Putting in a wild and volatile day of trading Wednesday, March natural gas futures ratcheted higher in the morning to put in a $9.820 high before collapsing lower. After notching a low of $8.700 late in the session, the prompt month settled at $8.723, down 59.3 cents on the day.

Weather forecasts continue to call for winter cold next week (see related story), but with the traditional heating season more than halfway over and natural gas storage levels near record levels for this time of year, cold concerns were mostly muted.

"The only word we got from the [Nymex] floor was that the move lower was on relatively light volume," said a Washington, DC-based broker. "It was just stops going off and there wasn't anybody in the way of them, so we kept popping lower. There didn't appear to be an interest to step in and buy it at a discount, so it really looked like the March contract fell under its own weight. My bet is we will see that it wasn't a very high-volume day. I think it was really a lack of buyers rather than any real attempt to hammer it lower and get mega-short again."

Crude futures were lower as well Wednesday, but the broker said he didn't think that played a part in the decline in natural gas. "Natural gas really went first," he said, noting that "crude sort of followed it down. It really was following natural gas most of the day." March crude finished Wednesday's regular session $1.36 lower at $66.56/bbl.

Commenting on March natural gas' 88-cent rally Monday, the broker said when you put it in perspective, it really wasn't much more than a blip. "That rally was really no more than a little mogul on the whole downslope of the giant sell-off," he said. "I really didn't expect it to hold anyhow because we still have plenty of gas in storage, even in the face of forecasted cold for February. It is still February after all, it is supposed to be cold."

Looking ahead, the broker said he sees a span of choppiness. "I think we will see some choppiness as the market tries to sort things out here before we begin the normal seasonal rally in natural gas prices, which is maybe a few weeks away."

Addressing Thursday morning's natural gas storage report for the week ended Jan. 27, the broker said he believes the Energy Information Administration will report that 71-81 Bcf will have been withdrawn from underground stores. A Reuter's survey of 21 industry players is calling for an average withdrawal of 87 Bcf.

Golden, CO-based Bentek Energy said its storage sample indicates that 84 Bcf was removed for the week, with 56 Bcf coming from the East region, 15 Bcf coming out of the West region and 13 Bcf being removed from the Producing region.

Wednesday afternoon's ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, zeroed in on an 85.9 Bcf withdrawal for the week.

The numerical range debate this week appeared to be like shifting deck chairs on the Titanic compared to last year's 193 Bcf withdrawal and the five-year average withdrawal of 172 Bcf.

Prior to Wednesday's futures price drop, top traders saw the anticipated cold weather as the main force behind the recent market strength. "The weather has evolved as the main bullish driver with colder temperature expectations beginning about the middle of next week forcing the bulk of the bullish enthusiasm. However, with bearish storage statistics still expected at least through the 9th of February, we are viewing the shift toward colder patterns as a classic 'too little too late,'" said Jim Ritterbusch of Ritterbusch and Associates prior to trading Wednesday.

Ritterbusch suggested that the approaching cold weather could strengthen cash basis, but is skeptical that cash market strength will be reflected in March futures. "The nearby futures may lag next week's expected spot strength. and we favor sales of the March contract within the $9.10-9.60 zone with stop protection suggested above the $10.10 level. We are viewing last week's February futures low of $7.75 as a near-term downside target. Longer-term possibilities would exist to the $6.00-7.00 zone," he noted.

Market technicians were doubtful that the recent market advance could be maintained. "Even if (Thursday's) $7.75 was the seasonal cycle low, the rapid rate of the recent ascent is clearly not sustainable," said Walter Zimmerman of United Energy prior to Wednesday's session. Zimmerman is a student of market waves, who believes that market advances or declines occur in patterns.

Zimmerman's call prior to Wednesday's trade couldn't have been more spot on. "Our wave analysis suggests that one more pop up above Tuesday's high could complete a five-wave rally from Friday's low and set in motion a multi-day corrective retreat," he said. "So even though Tuesday's price action was not peaking action, we are wary of the ability of this rally to continue its recent pace."

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