March natural gas futures ground lower in light trading Friday as traders noted little in the way of new weather input and a nonresponse to January employment figures. At the closing bell March had shed 2.7 cents to $4.310 and April had slipped 1.5 cents to $4.342. March crude oil tumbled $1.51 to $89.03/bbl.

Short-term traders saw only minimal action. "It wasn't very active today, and nobody was talking weather as being a price driver," said a New York floor trader. "There wasn't much reaction on the floor to the jobs number."

Analysts see a market whose main source of demand is weather-driven and ultimately vulnerable to a soft economy. "We just looked at the EIA [Energy Information Administration] consumption numbers for November, and they were the highest November ever," said an Oklahoma analyst. He added that "while the heating degree day count has been abnormally high, the problem is that production has been really heavy. We are seeing some heavy draws, which has taken inventories to only 5 Bcf over the five-year average, but we also had a rig count increase last week. There is a lot of production coming in, and unless that slows down, I think we will see a pretty big hit to prices."

For the week ended Feb. 4 the number of rigs drilling for gas decreased slightly, according to Baker Hughes. Active rigs slipped two to 911 but remained ahead of the 878 tally a year ago. The U.S. total rig count rose seven to 1,739, up from 1,335 a year earlier, and horizontal rigs increase by eight to 981, well ahead of the 659 horizontal rigs operating a year ago.

The analyst noted that last year "the balance of 2010 strip was 25% higher than it is now, and last year we did have a pretty cold December coming out of all the financial news that was bearish. As far as the overall natural gas market goes, until we get industrial demand to ramp back up, we'll be producing all this cheaper gas because of all the shale plays, and the [price] baseline will be lower.

"The fundamental points are that the economy is weak; it might be coming back but it's not strong now." He said Friday's employment report was an indication of just how weak the economy was. "We are not where we should be from an economic standpoint, and we are producing cheaper gas. You mix all that together, and the price point drops off pretty quickly," the analyst said.

The release of January employment figures by the Labor Department was not the sort of stuff to give natural gas and energy bulls a warm fuzzy feeling. Expectations had been that nonfarm payrolls increased by 150,000, ahead of December's modest 103,000 gain, but the actual figure came in at a disappointing 36,000. The unemployment rate was forecast to be 9.5%, up from December's 9.4%, and the actual rate came in sharply lower at 9.0%.

Top traders see a sideways market, suggesting options strategies. "While giving allowance to a continued strong pace of horizontal production activities, we are still inclined to view the erasure of a supply surplus this winter as a development that has essentially balanced this market, and as such is deserving of a neutral interpretation regarding the one- to two-month price view," said Jim Ritterbusch of Ritterbusch and Associates. "Traders need to adapt to such major shifts in the balances by considering alternative strategies such as option positions designed to accumulate premium in what is likely to be a continued sideways trade."

The market seems to have done a good job of discounting weather at the top and bottom of the thermometer, and forecasts call for above-normal to much-above-normal temperatures deep into February. Commodity Weather Group of Bethesda, MD, in its 11- to 15-day outlook shows above-normal temperatures south and east of a broad arc extending from northern Minnesota to West Texas.

"The latest forecast trends offer Texas very little reprieve between [last] week's and [this] week's cold air outbreaks. Instead, the weekend should still be below to much below normal with the next surge dropping in early next week," said Matt Rogers, president of the firm. "The potential is there to repeat this week's extreme cold levels. Otherwise, rapid temperature moderation is seen over the eastern two-thirds of the nation late in the six-10 [day forecast] and into the 11-15 (including Texas). The European models are trending colder in the West, however. And they are showing signs of the Alaskan ridge returning along with a Greenland ridge to potentially usher in a late-period Midwest cold outbreak."

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