March natural gas futures slid lower Thursday as traders focused on near-term warmth and paid little heed to a government inventory report showing the second largest withdrawal from gas inventories of the season. By the end of the session March was 5.3 cents lower at $3.868 and April fell 6.0 cents to $3.901. March crude oil rose $1.37 to $86.36/bbl.

Market reaction to the government report was swift. At 10:30 EST the Energy Information Administration (EIA) reported a withdrawal of 233 Bcf, about in line with market expectations, and within the first five minutes of trading March futures traded as low as $3.825. By 10:50 EST March was at $3.850, down 7.1 cents from Wednesday's settlement.

Traders see the market's move lower as the result of a near-term focus on warmer temperatures. "The 233 Bcf net withdrawal was in line with market expectations, with the bearish price reaction indicating that the lack of a bullish surprise was enough to keep the market pointed lower and focused, at least for now, on current warmer-than-normal temperatures," said Tim Evans of Citi Futures Perspective.

Evans sees the market as exposed to additional cold weather, and it appears that the market is factoring no more than normal seasonal cold for the remainder of the heating season. "However, the 233 Bcf build was well above the 150 Bcf five-year average result and puts the total 141 Bcf lower than a year ago and 128 Bcf below the five-year average for the date. This leaves the market more vulnerable to further cold, such as the cooler-than-normal temperatures forecast for the end of the month. The price action may be bearish, but the data itself was not."

Evans himself was also forecasting a hefty pull, but for the next two weeks he expects to see reports of well-below-normal withdrawals. He was looking for a decrease of 215 Bcf, but for the week ending Feb. 18 he anticipates a draw of 64 Bcf, well below the five-year average of 149 Bcf, and for the week ending Feb. 25 he is anticipating a draw of 67 Bcf, below the five-year norm of 130 Bcf.

Risk managers taking a broader picture view see a market with few supply issues. "There's no reason to be bullish on natural gas unless there are supply constraints," said a California-based risk manager. "Utilities should just take advantage of that [no supply issues] and stay hedged with vehicles like options and call spreads. I have been buying SoCal April-October $4.50-5.25 call options for about 15 cents for my utility clients. That's a great deal. You want to be hedged in case there are some supply glitches."

The manager pointed out that a number of West Coast utilities had been using futures to hedge natural gas price risk, and "now when they come to me and want to hedge, they can see the beauty of options. They have been riding this market down using [long] futures for about one-third of their requirements."

In spite of moderating temperatures and resulting low withdrawals in weeks to come, others see the market positioned to advance. "Temperatures are expected to warm significantly in the next couple of days, and they are expected to be warmer than normal for most of the country (east of the Rockies) as we end this week," said Peter Beutel, president of Connecticut-based Cameron Hanover. "Readings are expected to be on the warmer-than-normal side through next week, but they are then expected to dip at the end of February. Last year notwithstanding, March can be a very cold month.

"After dropping from its recent highs, this market is now in a better position to continue moving higher over a potentially extended period of time. It simply comes down to the difference between being overvalued or undervalued. At existing levels, prices seem definitely undervalued, and when one compares natural gas to a basket of other commodities, it seems that natural gas has actually been the kicking post or worse."

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