Natural gas futures retreated Monday as traders quickly reacted to reports of some moderation in private weather forecasts while others attributed the magnitude of the decline to computer-driven sell orders. At the close February natural gas fell 15.6 cents to $4.580 and March retreated 14.5 cents to $4.598. March crude oil lost $1.24 to $87.87/bbl.

The setup for Monday's decline started during Sunday evening's trading when February futures spiked as high as $4.879. "This all happened [the initial rise] before anything even opened up. It looked to me like it was a programmed 'buy' and when there was no follow-through, the computer programs all had tight stops on them, and prices came tumbling down," said John Woods, senior trader at McNamara Options in New York.

"When you don't have a lot of volume in overnight activity, the market will just trade based on a limited number of bids and offers and prices can get distorted. The traders who did the buying were basically impervious to news. It was just a computer program that was hitting every offer on the way up. What I take from this is that it was a computer buy with tight stops, traders got wind of what was going on and smacked it."

Woods added that "You always want to take a look at the high and low in overnight trading, especially the spreads. Somebody can put in an order and put the market two cents out of whack. Basically nothing has changed. Half the country is freezing their behinds off and we can't get above $5. We have a lot of gas, and one out of 10 people are out of a job so there goes your industrial demand."

Risk managers see an improving market and strategically are looking for a spot to initiate short hedges. "We feel the gas market is doing better because of a combination of factors, such as expectations that the U.S. economy is going to continue to improve, declining rigs drilling for gas, rapid decline curves, rising prices for all energy products, and the most important in our view, everyone is so bearish; the market has been ripe for a nice short-covering rally," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

DeVooght cautioned, however, that "the gas market continues to be pressured by an overhang of physical product that can come to market. We do feel the prices over the past few months already reflect a lot of bearish news. It has been our thought that we could see a rally into the high $4s to the low $5s. At that time we will start to nibble on some producer hedges, utilizing primarily floors and collars."

At present DeVooght advises trading accounts to hold a long February futures position initiated at $4.05, which was rolled over from January, and to risk 22 cents on the trade. He says to raise the stop to $4.60. End-users are counseled to stand aside, and producers and physical market longs should buy the April-October 2011 strip consisting of a purchase of $4.50 put options and sales of $5.50 calls at even money for 10% of their production. DeVooght notes that the strip will be trading about 10-20 cents higher than the individual contracts.

Weather models over the weekend continued to crank out aggressive cold. Commodity Weather Group in its morning six- to 10-day forecast shows below-normal temperatures east of a line from North Dakota to West Texas with only Florida and Maine at normal levels.

"An impressive redeveloped warm ridge over Alaska and a strong polar vortex dropping into Eastern Canada are the primary weather drivers in North America over the next two weeks," said Matt Rogers, president of the firm. "This means more cold air transport down through the continent, but the details are tricky. A potentially strong-severe cold push targets the central to eastern U.S. in the six-10 [day forecast]. But in the 11-15, the models are debating the position of the Alaskan ridge and Canadian vortex. The Euro ensembles shift both west to target Calgary with more cold, but warm the Southeast. The American ensembles keep more cold to the East. We leaned toward the Euro again."

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