December gas futures gapped five cents lower at the open on Monday, tried and failed to close that gap, and then ended the day down 12.5 cents to $3.778, just above its daily low of $3.770. Warm weather, high storage levels and forecasts for an El Nino winter appear to be putting downward pressure on the market right now. Some observers already are eyeballing eventual targets near $3.05.

Tim Evans, futures analyst at IFR Pegasus, sees “a torrent of selling” being “unleashed” somewhere just below current prices. “The market is overvalued. What I’d like to see from a seasonal perspective is for prices to come back down and find a more reasonable valuation on a fundamental basis and move up from there,” he said. “On the weekly spot continuation chart if you connect the low from last January with the low from August, that line is just coming up through $3.05 this week.”

Before the market can break to those depths, however, it will have to move through support at Monday’s low at $3.77. “When I look back on the chart, I see the Sept. 3 low for the December contract at $3.754, so maybe that’s a level that will have added meaning to it. There’s also on the spot continuation chart a $3.67 low from early October. That’s another place it may hang up a little bit on the way down. Right now, I don’t think there is one number that anyone is focused on and that’s why the price action is a little slippery here.”

Cynthia Kase at Kase & Co. believes $3.69 is an important target. “However, on a break below this…a much deeper decline will ensue,” she said. “The same $3.52 level that we mentioned last week continues as support. However, prices of $3.42 and $3.30 have also become important. Our bias among these lower targets is for the $3.42 to become dominant.”

In the meantime, the market will have to deal with somewhat offsetting fundamentals: warm weather and storage withdrawals. In terms of heating degree days (HDDs), the National Oceanic and Atmospheric Administration (NOAA) said last week’s tally of 120 (population weighted gas home heating) was 7 more than normal, but 14 fewer than the prior week, leading some observers to expect a smaller storage withdrawal than the 27 Bcf the Energy Information Administration reported last week for the week ending Nov. 1.

Evans said he’s expecting a 10 Bcf withdrawal in this week’s storage report, which probably would be considered bearish. However, he is on the low end of market expectations, some of which are as high as 60 Bcf. For the same week last year, storage rose 35 Bcf.

The other factor that will be increasingly evident is the growing storage deficit compared to last year. Although overall inventories are still 138 Bcf above the five-year average, working gas levels are 7 Bcf below levels last year.

“I think you have to take practical approach to this market and watch the difference between the storage and the price action,” said Evans. “On the one hand, the year-on-year comparison is going to be bullish — we are going to see a widening deficit. However, you look at what we were able to get off the 27 Bcf draw last week — which was a rally for only 30 minutes before it came right back off — and then ask what are we going to do on a 10 Bcf draw this week — that should be a 10 minute rally, right?”

The weather this week also is milder than last week. NOAA expects 107 HDDs this week, which would be 14 less than normal (warmer than normal), 13 less than last week, but 18 more than the same week last year. In addition, the National Weather Service is forecasting above normal temperatures across nearly the entire country over the next six to 10 days. Below normal temperatures are completely absent from the map. Normal temperatures are forecast over the Southeast and Pacific Coast.

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