Expiring December natural gas futures posted a double-digit loss as traders elected to focus on an incoherent weather outlook and adjust positions as the deadline for December trading approached. At the close December had fallen 17.8 cents to $3.364 and January had skidded 14.0 cents to $3.525. January crude oil gained a stout $1.44 to $98.21/bbl.

Followers of Market Profile point to price action in Monday’s expired December contract as being a low probability price move, but one that took place nonetheless. Tom Saal of INTL Hencorp Futures in Miami in a report prior to the open said he expected the December contract to test Friday’s value area at $3.523 to 3.501, but from then on it was a “tough call” which way the market would go. A move higher was likely to test value areas at $3.603 to 3.581 and possibly $3.677 to 3.639. A move lower was expected to test a value area at $3.455 to 3.443.

Saal pointed out that the lower value area was present in the December contract but an equivalent value area was not exhibited by the January contract, thus making it a less likely price target. Events, however, proved otherwise.

With January now the lead futures contract, prices Tuesday can be expected to test Monday’s value area at $3.596 to $3.536. Bulls can take heart in that “there is no value area lower than Monday’s and all the other value areas [price targets] are higher,” said Saal.

The original methodology followed by Market Profile developer Peter Steidlmayer consisted of plotting prices as they formed throughout the trading day. Stationed in the Chicago grain pits, Steidlmayer noted that prices would often form a bell-shaped curve and he would buy and sell as prices moved below and above, respectively, the mode of the bell-shaped curve.

Saal points out that the same methodology can be used for natural gas futures trading in a longer time frame. “If you aggregate a bunch of profiles together from Nov. 14, the mode comes up as $3.548. We are still moving horizontally with prices slightly below the mode, but prices are not plunging.

“Prices should oscillate around the mode, but going forward we should move away from the mode. You just have to wait and see how the market moves away from that number. We don’t have any weather, so prices moved lower away from the mode.”

Weather forecasts may not be as much use as normal since forecasters are more uncertain than usual about the near-term weather outlook as their models show inconsistent results. “The high degree of variance from model run to run suggests we are probably entering a period of reduced model skill (just in time for the first half of December),” said Matt Rogers, president of Commodity Weather Group (CWG) in Bethesda, MD. “While the details vary, there is general agreement at least on the Midcontinent cold push in the six-10 that translates to the East Coast by the second half of the period.

“Huge discrepancies are seen in the 11-15 day. The American ensembles bring a second moderate to strong cold push into the Midwest, South and East. The European ensembles do not and instead start shifting toward a colder West and warmer East pattern by late in the period. This is a highly contentious issue. If the Gulf of Alaska ridge holds stronger, any East warming could be temporary again.”

CWG predicts a large ridge of below-normal temperatures stretching from Nevada to Illinois to Mississippi in its six- to 10-day forecast. The remainder of the country is expected to be normal.

Analysts suggest that the risk to market participants may be to those holding long positions. “No one wants to get left doing clean-up or being the last one off the plane. Futures markets often resemble plane rides, and everyone starts eyeing each other narrowly as the plane comes to a rest,” said Peter Beutel, publisher of Daily Oil Hedger. “Once one gets stuck standing but unable to move, the game is half lost. And in natural gas futures in 2011, no one wants to be caught long or short knowing how sharply quotes can and do move the other way. Today though, we have to imagine that the real urgency will be to avoid being too long for, well, for too long.”

With one month less available for gas withdrawals, Beutel sees the bullish camp in need of some healthy pulls. “After last week’s surprising build of 9 Bcf (estimates called for a draw of up to 19 Bcf), stocks are 23 Bcf higher than a year ago, against a surplus of 14 Bcf (0.36%) a week ago and a deficit of 17 Bcf three weeks ago…We will need some sustained cold weather to eat into the surplus.”

Directional traders made only slight adjustments to their balance of long and short futures and options, according to a government report. The Commodity Futures Trading Commission in its Nov. 22 Commitments of Traders Report showed managed money adding a small number of long contracts and reducing short positions. At the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) fell 15,818 to 311,645 and short contracts fell 9,718 to 223,016. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by 6,228 to 135,992 and short positions declined by 1,443 to 274,540. When adjusted for contract size, long futures and options at both exchanges rose by 2,299 and short positions fell by 3,872.

For the five trading sessions ended Nov. 22 January futures rose 1.9 cents to $3.561.

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