After beginning Tuesday’s session at the day’s high of $8.120, the February natural gas futures contract wound its way to a $7.900 low before expiring at $7.996, down 9.9 cents from Monday’s close. The March contract followed much of the same course on the day before closing out the session at $7.943, down 9.9 cents as well.

Now that the March contract has the spotlight, not much will change in terms of trading strategies, according to some traders. With storage levels still healthy and moderating temperatures expected across much of the United States for February, market watchers don’t see much of a reason for front-month futures to stray outside the recent $7.500 to $8.500 trading range.

Considering where the cash market has been trading recently, traders were not surprised by where the February contract left the board in terms of price. Gas traded at the Henry Hub Tuesday for Wednesday delivery averaged about $8.10, or about a dime above the February settlement.

“The thing that decides where we settle on expiration is not technicals and is only to a certain extent fundamentals. The real answer is who wants to make or take delivery at the current trading price,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “On the last day there are no specs or funds in there; it is only end-users and producers. So where has cash been trading most of the week? The answer is right around where we expired Tuesday. Now I thought we might have gone off the board a little lower than this due to the forecasts for next month, which are for some pretty warm temperatures.”

Kennedy noted that the selling forces were evident in other contracts on the day. “We had good fund selling in both March and April on Tuesday,” he said. “I think these forecasts for a relatively warm February will likely keep downward pressure on futures. While we are likely to see a big storage withdrawal Thursday for the week ended Jan. 25, we have plenty of gas in storage and no problem with supply. Add to that the mild forecast and basically you have the whole picture. Much like the February contract, I think buying in the March contract will come in at $7.500 and selling will be triggered up at $8.250.”

From an economic standpoint, top traders see the market in equilibrium. “On a strictly fundamental basis, the energy markets are as finely balanced as we have seen in a very long time,” said Mike DeVooght of DEVO Capital Management. He offered the caveat, however, that the balance was contingent on the maintenance of current demand levels. A disruption of that demand by broader economic factors could easily tilt the market toward lower prices.

“It has been our feeling that demand is not sustainable at current price levels. And any demand contraction could have a significant impact on future price levels. In our opinion, the best indication for future growth prospects is the major world equity markets. And at this time they are pointing to a significant contraction,” he said in a note to clients.

DeVooght currently advises trading accounts to hold short April futures at $8 and end-users are counseled to stand aside. Producers and physical market longs are advised to hold a short winter 2007-2008 strip previously established at $9 for 65% of production and a short position for next summer at $8.250 to $8.350 for 50% of production.

Other traders were also favoring the short side of the market ahead of Tuesday’s session. Phil Flynn of Alaron rolled his short February position to a short March “at approximately $7.950 with a stop at $8.070.”

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