January natural gas futures fell hard Monday as weather forecasts were adjusted to a slightly warmer outlook, and the Energy Information Administration (EIA) released higher production figures. At the end of the day January futures were down 18.9 cents to $4.210, and February had skidded 17.8 cents to $4.234. January crude oil surged $1.97 to $85.73/bbl.

Forecaster MDA EarthSat made a slight modification to its 11- to 15-day outlook. "The forecast is significantly colder across the Southeast and warmer across the Plains and the West today compared to Friday and the Sunday Update," it said in a morning report to clients.

In its November Natural Gas Monthly Report the EIA raised its estimate of August production to 62.6 Bcf/d, up slightly from its October report. The increase was modest, but not the type of data natural gas bulls were looking for.

Traders saw the surge in crude oil prices as a factor as traders will often spread one commodity against another, in this case selling natural gas against the purchase of crude oil. "Some possible renewed spreading interest in buying oil and selling gas may have also accentuated today's sharp price drop," said Jim Ritterbusch of Ritterbusch and Associates. He added that Tuesday was unlikely to be as active as Monday, and anticipated "the usual Tuesday price consolidation within today's wide 32-cent trading range. While some of the economic data during the next couple of days could force a moderate response, we feel that daily updates to the temperature views and Thursday's storage report will provide the main features to this week's trade. By and large, we continue to see a 'tug of war' within this market between occasional bullish near-term weather forecasts and a bearish long-term supply outlook that should keep the nearby futures contract in a wide swinging sideways mode between about the $4.00 and $4.50 parameters. For now, our short-term trading posture remains tilted toward the bearish side as we continue to suggest holding any existing short January positions in quest of further price declines toward the $4.00 area."

In spite of the day's price rout, traders aren't discounting the possibility of a short-covering rally. Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm, noted that for the second time in a row the market did advance from the prior week, albeit on light holiday-diminished volume, but he said, "There is a good chance for a short-covering rally, which may drive the forward curve into the low $5.00 range."

DeVooght currently advises trading accounts to hold a long January futures position from $4.05 and risk 22 cents on the trade. End-users should stand aside, and producers and physical market longs should hold the remainder of a 12-month $5.50 put option offset with the sale of a 12-month $7.50 call initiated last December.

Technical analysts may not see a short-covering rally per se, but for the moment the bullish case is intact. "Although the most recent daily candles [candlestick chart patterns] look very much like potential doji star tops, there is no case for peaking without a decisive confirming decline," said Walter Zimmerman, a vice president at United-ICAP. "That is the bullish news. The bearish news is that natgas has rallied into a potential resistance zone," he said in a weekend note to clients.

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