March natural gas futures inched higher Friday in a day of lackluster trading. In spite of the market's ability to hold above $3.80, analysts are sharpening their pencils and counting the next move lower as they see a lack of weather-driven demand eroding prices. At the end of the day March was higher by eight-tenths of a penny to $3.876 and April added five-tenths of a cent to $3.906. March crude oil eased 16 cents to $86.20/bbl.

"It was a very quiet session and very few spreads were traded. I think a lot of traders were out today because of the Monday holiday," said a New York floor trader.

"The weather hasn't affected this market much at all. We are still under $4 and we have had a brutal winter here on the East Coast. There is still a lot of gas in storage, and even with the amount being taken out there is plenty of gas around. I think you can see a market that once the weather goes away, prices will ratchet down again."

One trader versed in Elliott Wave and retracement techniques also sees another leg lower. "Our support area has been $3.80 to $3.87, and beyond that we are looking at $3.05, the end of a fifth wave down. That might not be so crazy. It wasn't long ago that we had a $2 handle in front of this market," said the Washington DC-based broker.

"After the [heating] degree days we've seen this winter it has been a furnace's delight, and the best you could do is reach $4.80? I have lots of happy heating oil dealers throughout the Northeast, and even if we get cold in March it's different and won't have near the impact of the earlier winter blasts. The groundhog was correct, and it's all downhill from here," he said.

The broker admitted that even some producer clients sold [hedged] when prices were above $4, and "until prices broke below $4 a lot of trading volume dried up. There were marketers that were locked in, and some just elected to float with the market. Now that we are looking ahead to the summer strip, we are seeing some buying emerge."

As far as any indication that industrial or commercial demand was increasing, the broker said "we look at the PMI (Purchasing Managers Index), and we have only seen a little bit of improvement in that. It's nothing to write home about. It's been very gradual."

The consensus on near-term weather seems to call for moderation if not "warmth," and energy bears continue to play that tune. Forecasts, however, show a lot of variability, and any cold that is forecast bears little resemblance to the brutal onslaughts that recently raked the East and Midwest. Commodity Weather Group in its morning 11- to 15-day forecast shows temperatures three to five degrees below normal north and west of a broad arc extending from northern Pennsylvania to northern Colorado and turning abruptly south to western New Mexico.

"The West continues to be locked into a persistent cold pattern through the next two weeks with sometimes very chilly conditions in California and especially in the Pacific Northwest up to Calgary. The eastern two-thirds of the nation are more variable with both warmth and cold weather over the next two weeks," said Matt Rogers, president of the firm. He added that "today's [Friday's] forecast progressed and shifted warmer for the East Coast, particularly for late next week. But otherwise, there were colder trends for parts of the Midwest and then East in the 11-15 day. The models actually still show widespread 11-15 day cold chances with the exception of the Deep South including Texas."

Top analysts see the market attempting to reconcile a short-term bullish supply dynamic and the prospects of ever increasing production.

"Fundamentally, a growing contrast is becoming evident between what would appear to be a bullish short-term supply situation as underscored by the supply deficit [inventories below last year and the five-year averages] and a bearish long-term supply feature that is still being highlighted by a much elevated production pace," said Jim Ritterbusch of Ritterbusch and Associates.

"The specter of high production levels going forward appears to be winning out for now with yesterday's [Thursday's] fresh lows enhancing the confidence of the bears. Turning this ship around will not be an easy process as this market feels like one that will require some base building prior to a sizable price upswing," he said in a note to clients.

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