March natural gas futures Thursday took the plunge below the psychologically important $4 support level and couldn't recover, possibly dooming the market to a prolonged period of sub-$4 prices.

The Energy Information Administration reported a withdrawal of 209 Bcf from inventories, well above the 202 Bcf revealed in a Reuters survey prior to the release of the figures. At settlement the March futures contract was 5.8 cents lower at $3.986 and April fell 4.6 cents to $4.037. March crude oil rose 2 cents to $86.73/bbl.

Even with the higher-than-expected withdrawal figure, prices were not able to develop any lift. "The funds just keep pounding it," said Ed Kennedy, vice president at Hencorp Futures in Miami. "There were some buyers, but the funds have the bit firmly in their teeth, and every time prices rally they come in and slam it. I don't know what they are looking for on the downside for you are below the cost of production and way below cost from shale. How much lower can it go?"

Others see the market continuing to grapple with issues of oversupply even in light of the stout withdrawal. "It's a testimony to how well supplied this market is that we have endured such a winter with little price appreciation," said Bill O'Grady, vice president at Confluence Asset Management in St. Louis.

"If we had a winter like this anytime between 2000 and 2008, prices would have been $25, but not this time around. I'm working under the assumption that gas prices will be low for the next five years. You have to look at how long it took the gas bubble to diminish. It was clear in 1987 that the government had set the price too high and there was way more supply than demand and prices stayed weak until 2000. It took 13 years for supply and demand to come back into balance."

O'Grady isn't convinced that operating costs are above prices. "The argument that prices are below the cost of production for shale wells has been out there for the last three years," he said. "I don't know if it is accurate or not, but I hear those arguments when I go on the road and it usually comes from guys who claim their own costs are around $2-2.50 [per Mcf], but they know everyone else is $7 to $8. I can't say with any degree of certainty that they are correct, but it has been going on now for three years. Either these guys are hemorrhaging cash and being stupid or their costs aren't that high."

In the near term higher prices may be more of an issue of funds and managed accounts relinquishing some of their substantial short positions. "You are going to have to scare the [fund] shorts, and in this environment there is nothing to scare them and they will continue to roll [short positions]. I am longer-term bullish," Kennedy said.

Assuming the correlation between heating requirements and inventory withdrawals holds, next week's inventory pull report is likely to be almost as big. National Weather Service (NWS) heating degree day (HDD) data show that for the week ended Feb. 5, 908 HDD were tallied across populous energy markets from New England, New York and as far west as Wisconsin. For the week ended Feb. 12, NWS predicts an accumulation of 893 HDD for the same region.

Prior to the release of the figures traders were circumspect about the effect of the storage report on near-term prices. They note that on many occasions whether the injection/withdrawal number came in above or below expectations was less important than the fact that traders used the number as a trading event and prices would typically follow the near-term trend.

"We have come off of highs of $4.70 or so just over a week ago and the market feels like it wants to go still lower. I have the sense that traders are willing to let the market fall, and there is no great amount of buy orders under the market willing to take advantage of lower prices. There may be some buying on the way down, but it still feels there are a number of sellers out there," a New York floor trader said.

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