Following a Christmas Day storm that dropped as much as three feet of snow across parts of central New York and despite higher crude oil prices, natural gas futures funneled lower Thursday as traders alleviated overbought conditions and pressured the market to its lowest level in more than two weeks. With that the January contract completed its penultimate trading day at $4.962, down 18.4 cents for the session. January will expire Friday at 2:30 p.m. EST.

Several traders contacted by NGI were quick to point to the buy-the-rumor, sell-the-event mentality as a reason for the dramatically lower natural gas prices. Since spiking upward and notching a $5.53 high, the futures market consolidated within the $5.00-50 area for the past two weeks. Traders agreed that a break above that would have put the $6.00 level in traders’ sights. However, when the market broke lower Thursday, market-watchers immediately began looking down to the Dec. 11-12 chart gap at $4.75-78.

Also of influence when the market broke below $5.00 was option-related selling, said Ed Kennedy of Commercial Brokerage Corp. in Miami. Specifically, he pointed to the more than 13,000 in open interest at the $5.00 call. “When the market broke lower, there was no reason for the writers of those calls to continue to hold their January futures positions. There was no reason for them not to sell,” he reasoned.

“The market just wore itself out to the upside,” said George Leide of Rafferty Technical Research in New York. “We had some good consolidation and now we are working off the overbought conditions. There was a pretty decent long accumulation on the move up and they are selling right back out on the way down.”

Looking ahead, Leide remains bullish in the medium to long term, but sees the potential for more weakness in the short run. “We are still bullish but want to get long again at lower levels,” he said. “There was pretty good support at $5.00 and now that we are lower, there is a good chance of a push down to $4.75-78. Below that level, $4.65 is possible,” he said, noting that February has roughly the same technical levels as the expiring January contract.

For Kennedy, picking the direction of the market on expiration day is difficult enough without also having to worry about storage-related volatility. The Energy Information Administration will release its weekly storage figures Friday at 10:30 a.m. EST, four hours ahead of the January expiration. “This could be a real mess,” said Kennedy. “Everyone pulls their orders at 10:28 and this creates a [trading] vacuum in which prices move very easily just after the report is released.” He noted that this volatility will come on top of the usual expiration-day price swings.

Last year the market pulled only 80 Bcf from the ground and expectations ahead of Friday’s report call for anything from a 90 Bcf to 140 Bcf withdrawal. This wide-ranging estimate is a result of the string of storage reports that have exceeded virtually all market expectations. The market was stunned by the last two weekly withdrawals announced by the EIA — 162 Bcf followed by 159 Bcf. In both cases, the market had called for a 130-140 Bcf drawdown, prompting some market watchers to now suggest that either supply is down or that storage players are betting heavily on El Nino to bring mild winter temperatures and reduced demand for natural gas.

A backdrop to this apparent lack of supply-demand equilibrium is the continued forecasting inaccuracies by the National Weather Service, said Kennedy. “They have called for warmer-than-average temperatures for the last two months and it has yet to show up. Boy, did they blow the Christmas forecast,” he mused. The result of these miscalculations is that many traders are like a deer caught in the headlights of a truck, afraid to do anything for fear they will get hit, he said.

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