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Warm Weather Forecasts Trump All; Futures Finish Week Lower

After failing to sustain a rally off Thursday's bullish storage report, traders pushed January natural gas futures even lower on Friday. The contract recorded a low of $7.300 before settling at $7.409, down 14.6 cents on the day and 15.2 cents lower than the previous week's close.

While the tenuous technical picture continues to square off against weather forecasts calling for warm temperatures through month's-end, traders and brokers alike are quick to point out that during this time of year, the futures market is weather-driven.

"Trading on Thursday was even more telling than the action on Friday," said Steve Blair, a broker with Rafferty Technical Research in New York. "People were looking for a storage withdrawal of 150 to 155 Bcf, so when we got a 168 Bcf withdrawal for the week ended Dec. 8, the market blasted off to the upside. However, the failure to get above $8 really was the portent of things to come. The market's failure to get any higher than $7.910 showed everyone that this market is more concerned with short-term weather due to the fact that we still have a boatload of storage. The weather certainly is the overbearing factor on this market."

Blair noted that Friday's action also posed a few questions. "One of our first support numbers was $7.300, which ended up being the low on the day Friday," he said. "If we break through that $7.300, then we will probably see this thing getting to $7 or below pretty easily. One of the only things that could turn this thing around would be if the weather forecasts started calling for more cold. Everyone keeps their eyes on the weather forecasts because we are certainly in a weather market and not a storage market."

Before Thursday's plump 168 Bcf withdrawal figure was released, a New York floor broker told a client, "If the number comes out bearish, sell, and if it comes out bullish, sell it harder." The trader noted that the early rise that sent January futures as high as $7.910 was attributable to some traders taking "some money off the table," but ultimately traders conceded that this was just one week's number and overall the market was "heavy."

"I don't think the market can sustain a price advance. There may be some market-moving event that causes a short-term rally, but unless there is a cataclysmic development, there is a good chance we are going to come off from here," the floor broker said.

Top technicians are taking a wait-and-see attitude towards further price declines. Retracement analysis may give an idea if further price erosion is on the horizon. "Our Thursday target (high) was $7.920 as the 0.382 retracement of the $9.050 to $7.216 decline," said Walter Zimmerman of United Energy. He pointed out that in Thursday's trading, January futures rallied 23.7 cents to a $7.910 high, then fell 38 cents to form a very bearish candlestick pattern on the daily charts.

As bearish as that may seem, bulls may have a chance at staging at least a modest rally if prices can hold. "Peg $7.140 as key support for the case for a corrective bear market rally as the 0.382 retracement of the entire $4.050 to $9.050 rally," Zimmerman said. He noted that a decisive close below the key $7.140 support would imply a further decline to the $5.960 area.

Weather conditions may have the last word. The National Weather Service (NWS) in its forecast covering the Dec. 23 to Dec.29 period predicts above normal temperatures for West Coast, Midwest and some Northeastern energy markets. New Mexico, Texas, Louisiana, Mississippi, Alabama and Georgia are forecast to see below normal temperatures. The rest of the country should see normal conditions.

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