January natural gas swan-dived lower Friday as traders noted a continuing deterioration in both the fundamental and technical dimensions to the market. At the close January had fallen 14.0 cents to $3.317 and February had given up 13.3 cents to $3.353. January crude oil added $1.07 to $99.41/bbl.

“It looked like some momentum-type funds were reestablishing short positions,” said Eric Bentley, CEO of VKNG Energy LLC in New York. “Certainly the supply picture and the fundamental picture has the market poised to fail at any attempt to poke its head up, and we are very close to the December contract’s low of $3.285. That will be under attack, and there are likely to be sell stops underneath it. We are also close to an old low of $3.21.

“You had fund selling going on and at the same time there were indexers [commodity index funds] rolling longs in January, and depending on what index they are selling, buying February and March. So for every seller in January you had the buyers spread out over other contracts, thus the bigger drop in January.

“Some of the cash market is trading with high $2 handles. That would not lead someone to buy the market, but some of those big support numbers could hold and spark a turnaround rally. Overall, if you wanted to get involved in the market, the smart money is selling even though prices are way down.”

Bentley suggested that the only factor that would change his outlook would be a turnaround in the weather sending massive cold throughout the East and Midwest. “Anything near term is not going to do much here. A long-term [weather] model showing cold here to stay is needed. The surplus is significant.”

Unfortunately for the bulls, or perhaps even those seeking steady prices, populous eastern and Midwest markets are forecast to see near-term warmth. “Above-normal temperatures are expected from the Great Lakes and Ohio Valley to the East Coast. Below-normal readings are anticipated over the Pacific Northwest and the Southwest,” said WSI Corp. in its 11- to 15-day outlook.

It added that Friday’s forecast was a little warmer than the day before for the Northeast and conceded that risks to the forecast included temperatures running “still colder than forecast over the interior western U.S. A mean trough in this region could be deeper than even what the European ensemble model implies [Friday] morning since it also indicates a strongly negative PNA [Pacific North American pattern] and positive AO[Arctic Oscillation]/NAO[North Atlantic Oscillation] pattern.”

Prices opened the day session sharply lower, and according to Jim Ritterbusch of Ritterbusch and Associates, the “market came under heavy selling pressure [Friday] following a breakdown into new low territory below the $3.40 level. This technical deterioration is going hand in hand with increasingly bearish fundamentals that were unaltered by [Thursday’s] stronger-than-expected storage withdrawal. The fact that a record supply is likely to see further surplus expansion as the winter proceeds represents a bearish dynamic that will limit occasional price rallies to short-covering sprees on the part of the funds. The market is also responding to continued above-normal temperature forecasts that are expected to swing from the East Coast and into the Midwest within the more extended 11-15 day views. The market has easily been connecting the dots between these mild temps and a seasonal supply draw during December that will prove unusually modest.”

Technical analysts are also feeling the bearish heat. With Friday’s settlement at $3.317, the January contract is now in a new pricing regime. According to technical analysts versed in Elliott Wave and retracement analysis, the $3.371-3.345 range was seen as key support. “As long as natgas can remain above this zone, the case for bottoming action will remain intact. Sink below $3.371-3.345 and a more substantial test of the $3.200-2.956 zone would be expected, at minimum,” said Brian LaRose, an analyst at United-ICAP. From a seasonal perspective, however, natural gas is out of sync with normal patterns and “as this is not the time of year for bottoming, it is possible natgas merely consolidates for the next several weeks or even months.”

©Copyright 2011Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.