Futures continued to work lower Tuesday as weather forecasts softened and funds and managed accounts squared their books. Traders see a fall below $4 as virtually inevitable and expect continued weakness. At the close March futures fell 6.4 cents to $4.040 and April dropped 6.8 cents to $4.072. March crude oil shed 54 cents to $86.94/bbl.

"Today you had a lot of index funds rolling positions from March into April and May," said Eric Bentley, CEO of Viking Energy LLC in New York. He noted that in February index funds such as Goldman Sachs, AIG, and Credit Suisse had added approximately 50,000 to 60,000 contracts to their portfolios and "all those positions are getting rolled out. Some were moving their [long] March positions to [long] April and others to [long] May.

These trades are widely anticipated and traders knowing that the large funds will be rolling (selling) March and buying April or May will often try to sell ahead of or buy ahead of the time the funds make their trades. "If you look at the March-May differential last week it was 3.5 to 5.5 cents and now its trading 9.5 to 10.5 cents. Somebody traded that spread aggressively, and trading the roll goes on from about the fifth business day of the month for five days," said Bentley.

In its most benign form a commodity index fund attempts to act as a hedge against rising commodity prices and can be useful for protecting investments such as a bond portfolio, which can perform poorly in times of high inflation. The funds typically only carry long positions across a wide range of commodities and attempt to increase their value in times of rising prices. More aggressive commodity funds will trade from both the short and long side and attempt to capture value from both rising and falling prices.

"Overall the market looks ugly, and the market cannot sustain any kind of rally. I don't think you would shake out many shorts if this market were to rally. If prices for a high-demand month such as March are on its tail, May, June and July should tag along too," Bentley said.

"$4.12 and $4.13 were big [support] numbers in Monday's trading, and the high today was right there [$4.127]. $4 support is a huge psychological factor, and earlier support was found at $3.68 and $3.83. If you are a bull, you are standing alone in the field and people are shooting at you."

Overnight weather models trended warmer in the six- to 10-day period. Commodity Weather Group of Bethesda, MD, predicted a ridge-like accumulation of above-normal temperatures reaching as far south as the Texas Panhandle, but in the latest iterations models show above-normal temperatures extending farther south into Mexico. Another cold episode is predicted for the 11- to 15-day period.

"We are still tracking an impressive cold event that is currently unfolding over the nation's middle third," said Matt Rogers, the firm's president. "This outbreak is hitting the Midwest and South stronger than the East Coast, and all of this starts moderating very quickly toward the weekend. The warm-up for next week carries good model support, although there is bigger debate on the East Coast (American models only warm to normal and Euro guidance above to much above). We favored the warmer Euro versions. The West should start trending colder again by late six-10 day and the ensembles are progressing the cold pattern for other areas inside the 11-15 day."

Top traders at one point viewed the market through a balanced lens, with cold weather patterns and the erasure of storage surpluses being a supportive force offset by expectations of aggressive production. That appears to be changing.

"Although we had been advising a connection between average supply levels and a neutral pricing outlook, the sharp selloff of recent sessions is suggesting a continued heavy focus on the dynamic of an exceptionally strong production pace," said Jim Ritterbusch of Ritterbusch and Associates. "As a consequence, downside possibilities to the $4 level are beginning to appear conservative, and a $3 price handle could easily be achieved this week should mild temperature ideas become stretched toward month's end. In sum, a bearish trading posture is favored over a very short-term time frame that extends out through the balance of this week."

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