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Futures Drop 11 More Cents as Traders Eye Warm-Up

While temperatures throughout the Midwest and East remained frosty Friday, natural gas futures traders were more concerned with the forecasted warm-up following the weekend. As a result, January futures reached a low of $7.500 before closing at $7.561, down 11 cents on the day and a considerable 86.1 cents lower than the previous week's settle.

Even more surprising than the recent drop in near-month futures is just how far the contract has fallen in a limited amount of time. Over the last seven regular trading sessions, January natural gas has plummeted $1.55, or 17% from a high of $9.050 on Nov. 30 to a low of $7.500 on Friday.

"There is certainly vulnerability to the downside here and the only possible bump in the road that I can see is the storage data off of this week's temperatures, which will likely give us a larger withdrawal than the 110 Bcf five-year average, but smaller than the 182 Bcf date-adjusted figure from the same week a year ago," said Tim Evans, an analyst with Citigroup. "It should sort of split the difference of those two numbers in the storage report for the week ended Dec. 8."

Evans added that weather still rules the direction of the futures market -- one week at a time. "If there is a consistent theme here, it is probably that the futures market is focused on the six-to-10-day period," he said. "That is what leads the price. It didn't matter last week when it was warm because the six-to-10-day outlook was cold, which helped us get up to that $9.05 high. Now we've got current cold temperatures that will result in some kind of large storage withdrawal, but that may not matter because the six-to-10-day forecast tells us warmth is coming."

Some top traders are keenly aware that the market does not have a complete grasp of winter weather and its resulting impact on the supply-demand balance. "All in all, some downside risk remains intact due to the mild temperature expectations. But any evidence of a shift in the weather forecasts toward colder patterns should force a buying resurgence," said Jim Ritterbusch of Ritterbusch and Associates. He said that even though supplies are more than ample "we still feel that upside response to cold temperature forecasts could still prove dramatic and as a result, we are reluctant to follow this price decline below the $8.00 level."

Forecasters continue to debate the strength and longevity of any winter warmth. Much of the forecasts are calling for a mild winter resulting from interpretations of the strength and durability of the current El Nino conditions in the eastern Pacific Ocean. Forecasters suggest that El Nino will deflect the jet stream to a west-east pattern and impede the incursion of arctic air. The National Oceanic and Atmospheric Administration (NOAA) has said "eastern equatorial SST [sea surface temperature] anomalies are just about the warmest they have been since the 1997-98 event, leaving no doubt that the Peruvian coast is indeed experiencing El Nino conditions in the original sense of the term."

Warmest or not, Joe Bastardi of AccuWeather believes we may have already seen the maximum impact of El Nino. "I feel this El Nino has peaked. The SOI (Southern Oscillation Index), which I believe showed this coming on, is nothing like the years mentioned that there was a strong El Nino," he said. Bastardi believes that the National Weather Service has done some solid analysis, but he is skeptical of its estimates of the magnitude of the current El Nino episode. "My take is that the excellent analysis of this is something that has to be considered and I will be watching it."

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