January natural gas continued its march towards $3 as recent weather forecasts hint of milder conditions and a subsequent low withdrawal from storage inventories. At the close January had retreated 3.1 cents to $3.096 and February gave up 3.1 cents t $3.143. January crude oil gained 35 cents to $93.88/bbl.

Traders see any bullish case continuing to slip slide away as moderate temperature forecasts are expected to continue building an already burdensome storage surplus. “Although the market could see some consolidation during the next couple of sessions ahead of Thursday’s EIA [Energy Information Administration] report, price rallies back toward last week’s highs ($3.30 Jan) appear remote, even allowing for another bullish miss within the weekly stats,” said Jim Ritterbusch of Ritterbusch and Associates. His calculations show this week’s withdrawal report falling “fall far short of last year’s 181 Bcf decline with the expansion in the supply surplus continuing to keep the large institutional entities securely entrenched on the short side of this market.

“In addition to the bearish short-term weather factor, the market will also be contending with a downsizing in industrial demand during the next couple of weeks as many manufacturing plants shut down for three-day holiday weekends. Although this is a seasonal holiday-related phenomena, some response from the cash market could still be seen. Physical prices at Henry Hub have slipped to around the $3 threshold as they continue to provide a downward drag on nearby futures relative to more deferred contracts.

“Overall, we are maintaining a short-term bearish view in anticipation of nearby futures dropping to the $2.98 area where we will expect enough support to launch a possible price advance of around 5-7% with even a modicum of assistance from the weather factor,” Ritterbusch said in a closing note to clients.

The most recent government figures show something of a different trading trend. Directional traders curiously added to long positons and exited short positions. The Commodity Futures Trading Commission in its Commitments of Traders Report for the five trading days ended Dec. 13 disclosed that managed money at the IntercontinentalExchange increased long futures and options (2,500 MMBtu per contract) by 7,451 to 389,320 and short contracts decreased 6,877 to 236,382. At the New York Mercantile Exchange long futures and options contracts (10,000 MMBtu per contract) rose by 1,286 to 142,439 and short positions decreased by 2,293 to 261,577. When adjusted for contract size, long futures and options at both exchanges rose by 3,148 and short positions decreased by 4,012.

For the five trading days ended Dec. 13 January futures skidded 20.8 cents to $3.279.

Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm, suggests that trading accounts along with end-users should stand aside for now. He advises producers and those with exposure to lower prices to continue to hold the remainder of a November-March strip consisting of $4.75 put options offset by the sale of $7 calls for a 16- to 20-cent debit.

DeVooght is circumspect about the chances for the market to turn around. “[T]here is more-than-adequate supply, and demand is lackluster. We did see a slight larger-than-anticipated [storage] draw [report on Thursday], but it failed to give the gas market much support. What will eventually cause this market to bottom out is difficult to predict,” he said in a weekend note to clients.

Recent drilling data might hold some answers. Market observers have long kept track of the number of gas-directed rigs as a longer-term indicator of future supplies, but with high oil prices continuing to cast a long shadow over energy economics, the rate of oil drilling continues to rise, and along with it the amount of associated gas. Associated gas from oil production could very well continue to keep natural gas supplies ample if not burdensome.

Figures from Baker Hughes show that the number of rigs drilling for natural gas continued to edge lower and is well below levels of a year ago, but total wells in the U.S. and horizontal wells continue to show gains. In its weekly tabulation of rotary rig activity, Baker Hughes said for the week ended Dec.16 gas-directed rigs fell two to 818, far fewer than the 941 actively drilling for gas a year ago. Total rigs in the U.S., however, jumped by 32 to 2,019, far more than the 1,709 operating a year earlier. The number of horizontal rigs jumped by 33 to 1,184, well above the 954 active a year ago.

In its six- to 10-day outlook Commodity Weather Group of Bethesda, MD, said the big-picture weather outlook is a “variable, warm-dominated one with no blocking patterns. There are now at least occasional model hints of stronger ridging farther north in the Pacific and Atlantic, but we would need to see consistency/consensus build to support a real change. The stratospheric warming continues on the models and may lend to changes later in January if it persists and strengthens.

“Today’s forecast is same-to-colder for the Midwest and South in the six-10 based on reasonable model agreement. The biggest cold risk appears to be in Texas on days seven to eight (including Christmas Day). The rest of the South leans a bit more to the cold side today [Monday], too. The East Coast is warmer in the six-10 due to higher low temperatures,” said Matt Rogers, president of the firm.

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