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Futures Free-fall: 'We are Running Out of Winter'

The outlook for continued warm temperatures continued to weigh down natural gas futures on Monday as the January contract plummeted lower, recording a low of $7.040 before settling at $7.075, down 33.4 cents on the day.

"The weather picture continues to eat into this price level," said Tim Evans, an analyst with Citigroup in New York. "It has to do with the time of year, now that we are looking past the fourth quarter of 2006. It is very easy to project that we will have a comfortable storage surplus at year-end, so it is really time to look further than that. Without significant cold immediately ahead of us, it takes a more extreme scenario to create any credible threat of a shortage by the end of the storage withdrawal season. We are running out of winter."

Evans said there appears to be a long liquidation element to the market where traders are forced to liquidate because they have margin calls coming. "It might not necessarily be that traders are calmly calculating that gas is only worth $7, they might be frantically calculating that the margin call is going to drain their resources," Evans said.

As to where the bottom of this price drop might be, Evans warned that picking bottoms is dangerous business. "In the land of natural gas, it is always difficult to pick a number," he said. "I don't see Monday's drop as marking the exhaustion of the selling. You would have to be near psychic to look at this drop combined with the weather pattern and say that this is as low as we can go. There is no evidence that a floor has been reached. It is conceivable that the floor target could be $7, but it is also conceivable that the target could be $6, or even $5. It would be a bold call here to say: 'buy it.'"

Last week's mild temperatures brought the bears out of hibernation and this week may keep them out as well. Steve Kahn, WGN Weather Center Meteorologist in Chicago, said that new record highs were hit this weekend in Louisville, KY (70), Springfield, MO (68), and Beaumont, TX (79). Major energy markets such as Chicago and New York can also expect well above normal temperatures this week. "Though the 50s are gone here, the week ahead will still be mild for the season with highs in the upper 30s and lower 40s running well above the normals, currently in the lower 30s."

He said a storm was expected to bring rain, not snow, to Chicago later this week, and "it's beginning to look like Chicago will miss having a White Christmas for the third straight year."

AccuWeather says the high Monday in Chicago of 43 degrees will retreat slightly to 39 by Friday. Chicago's normal high is 35. New York's balmy Monday high of 63 is predicted to fall to 47 by Friday, and New York's average high is 42.

Top traders are looking for selling opportunities. "With the amount of gas in storage and the amount of gas coming out of ground in the key producing regions, normal temperatures do not bode well for future gas prices," says Mike DeVooght, president of DEVO Capital. DeVooght points to very weak basis levels as suggesting lower outright prices. "We have seen and continue to see very weak basis levels. It seems that declining basis levels were the precursor to lower gas prices. On a trading basis, we continue to look for lower prices and will use any strength in the summer strip as a selling opportunity."

A Friday poll conducted by Bloomberg revealed a hefty bearish consensus. Of the 16 traders and analysts surveyed, 12 expected natural gas futures to fall this week. Four said prices will rise, and none predicted neutral market movement.

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