April natural gas futures continued their descent Wednesday as traders had to digest more moderate weather forecasts and sensed that although the market continues to hold technical support, it is just a matter of time before prices fall again. At the close April natural gas had fallen 5.5 cents to $3.818 and May dropped 5.6 cents to $3.894. April crude oil continued its sub-orbital flight path, adding $2.60 to $102.23/bbl.

Traders noted how quickly things can change; the natural gas market looked so promising to the bulls when back on Feb. 4 the April contract settled at $4.342, but it now hovers more than 50 cents lower. "One day the market looked really good and everyone was saying 'natural gas is back,' but now we are back to reality with two days of pretty substantial price devaluations and now you have to look below $3.82. It seems like the market is just hovering there, waiting to fall," said a New York floor trader.

He added that "the only question is how long is winter going to stick around. Now is the season when people can be more conservative with their natural gas use and with the weak economy people are more likely to try to save on their heating bills."

Analysts note that the weather outlooks have turned less supportive "with the updated 11-15 day temperature forecast looking less supportive than the outlooks from Monday and Tuesday, but with moderately cooler-than-normal temperatures for the West Coast, northern U.S. and much of the East Coast to maintain at least a moderately above-average level of heating demand," observed Tim Evans, an analyst with Citi Futures Perspective of New York.

Curiously, he said, "The natural gas market continues to suffer from bad press that focuses on U.S. supply growth without recognizing either the weak import levels or the below-average storage after a cold winter. This is a case of the price 'making the news' rather than the other way around."

The below-average storage levels are likely to improve with Thursday's release of government inventory figures. Currently working gas inventories stand at 1,830 Bcf, 48 Bcf less than last year and 61 Bcf below the five-year average, according to the Energy Information Administration.

Last year at this time 124 Bcf was withdrawn from storage and the five-year average is for a 131 Bcf pull. Estimates for the week ended Feb. 25 reflect a wide divergence with a Reuters report showing a range of 65 Bcf to 110 Bcf from a sample of 27 analysts. The average was 86 Bcf. Citi Futures Perspective is looking for a 96 Bcf decline while Kyle Cooper of IAF Advisors in Houston expects a 78 Bcf pull. Industry consultant Bentek Energy predicts a withdrawal of 71 Bcf with the East Region declining 64 Bcf, the West region dropping 21 Bcf and the Producing Region adding 14 Bcf.

Analysts are discounting the fact that heating requirements in major energy markets were actually above average for the week ended Feb. 26. The National Weather Service tabulated 281 heating degree days (HDD) for New England, 29 more than normal; and the Mid-Atlantic shivered through 255 HDD, or 22 more than normal. The Midwest from Ohio to Wisconsin accumulated 256 HDD, or nine more than its seasonal average. "I look at temperature profiles rather than heating degree days. The fact that you had the Presidents Day holiday in there may have lowered the estimates some," said Cooper.

The selling pressure on the natural gas market may have a connection to the turmoil and volatile prices in the oil markets.

April crude oil Wednesday jumped higher by $2.60 to settle at $102.23/bbl, and that may have contributed to April natural gas' demise. Recent experience has shown a highly negative correlation between crude oil and natural gas prices, and one line of thinking is that the persistent selling of natural gas, largely at the hands of funds and managed accounts, has been offsetting long positions in petroleum markets.

"Last week's best sellers, once again, seem to have come from the ranks of managed money accounts, which has been the source of so much selling over the last two years," said Peter Beutel, president of Cameron Hanover, in a recent note to clients. "This selling has not really taken much of a breather at any time over the last three years, instead coming in at fairly constant levels of selling, regardless of season and even regardless of news. Clearly, some of this fund selling is as a hedge against long holdings in the oil markets, where funds have invested heavily on the long side."

Market technicians at the onset of Wednesday's trading saw Tuesday's 16.4-cent retreat by the April contract as eventually setting up a buying opportunity, albeit at lower prices. With Wednesday's weak close, critical support levels are now in jeopardy of being severely breached. "Peg $3.844 (0.7862 of $3.775-4.100) as critical support for Wednesday. Turn higher from this level and another run at our $4.136-4.165 resistance zone will be possible," said Brian LaRose, a market analyst at United-ICAP. "Sink below this level instead and we would fully expect the downtrend to continue. Our next objective in this case: a large cluster of support stretching from $3.568 to $3.408. Suspect this will be a buy opportunity," he said in a morning report to clients.

The New York Mercantile Exchange reported that open interest in natural gas futures hit an all-time record of 982,208 as of March 1, eclipsing the previous record of 976,294 contracts reached on July 23, 2008.

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