Caught between bearish weather forecasts and slightly supportive technical features Friday, natural gas futures took the path of least resistance and shuffled mostly sideways to close out the week. The January contract settled at $2.568, up 0.3 cents for the session, but down 13.3 cents for the week. Estimated volume confirmed the quiet trading activity as only 65,069 contracts changed hands.

Some traders were surprised by the inability of futures prices to sink even lower than they already had last week on the continuation of unseasonably warm weather. However, temperatures were expected to shift to more seasonal readings for the weekend and cash prices were quick to react Friday. NGI‘s Henry Hub price for the weekend was $2.11, up 28 cents from Friday’s gas flow.

As a result of the lack of price direction, traders elected to remain mostly on the sidelines Friday. For Peter Hattersley of New York-based Rafferty Technical Research, the only conspicuous feature of Friday’s activity was the continuation of position squaring by traders seeking to lay-off their exposure to Enron.

“Enron was pretty good about letting you out of your position prior to the bankruptcy filing, but now that decision is a legal matter in the hands of the bankruptcy courts,” said Hattersley. “Suppose that you were long 1,000 contracts and short 1,050 OTC contracts with Enron before they filed for bankruptcy. You would now want to replicate that net short position by selling 50 contracts in the futures market.”

Looking ahead, the trader sees prices bounded in a relatively tight $2.45-71 range that could contain the market until a clearer demand picture is available. A settle below support at $2.45 would prompt him to look for another push to the downside, with the market’s next objective in the $2.11 area. However, a rebound back above $2.71 would be supportive, as it would violate downtrend resistance. “This market continues to wait for the weather,” Hattersley said. “There were some forecasts earlier in the week calling for cooling temperatures this weekend and it was those forecasts that allowed us to remain above $2.45. However, we are still in a downtrend — that much is unchanged. Traders are just waiting to see what demand will look like when it does get cold.”

According to the latest six- to 10-day forecast released Friday by the National Weather Service, above-normal temperatures are expected to continue across the eastern half of the country through the middle of the month. That undeniably bearish outlook, however, is countered by below-normal temperatures expected in the West. This Thursday the National Oceanic and Atmospheric Administration will release its updated 30- and 90-day outlooks.

Also of interest to traders on Friday was updated data released by the Commodity Futures Trading Commission. According to the group’s most recent Commitments of Traders (COT) report, which covers Nymex trading through Dec. 4, non-commercial traders increased their net short holding by 8,882 while commercial accounts decreased their longs by 6,277 over the same period. Offsetting this net-15,259 contracts of selling by the speculators and traders was an equal amount of net buying by small traders.

Tom Saal of Pioneer Futures in Miami is inclined to side with the “smart money,” which he believes is the large professional trading segment of the market. Specifically, he believes the non-commercial segment has room to increase their net shorts from Tuesday’s 31,891 level to as much as 38,000 or 40,000 positions. “They like to ride the trend, and right now that trend is down,” he explained.

However, on closer inspection, the latest COT data reveals something interesting about the commercial segment, especially considering the recent downward spiral of its largest trader. By virtue of its liquidation of more than 70,000 long positions and more than 65,000 short positions, the commercial segment of the market last week logged the largest one-week decrease in open interest in the history of natural gas futures. Traders were quick to note that the record was obviously attributable to the mass exodus of positions as traders tried to limit their exposure to Enron. Commercial traders now hold positions equaling roughly 81% of the total open interest, down from their typical level of 85-87%.

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