While many expected the holiday-shortened trading session to be a quiet affair, February natural gas opened at $8.950 on Friday and steadily worked lower for a majority of the day. After putting in the day’s low of $8.740, the prompt month settled below $9 for the second consecutive session, finishing the week at $8.791, down 15.2 cents for the day and 84.1 cents lower than the previous Friday’s close.

Since the warm trend hit in mid-December, February natural gas has plummeted from a high of $15.780 on Dec. 13, 2005 to an intraday low of $8.740 on Jan. 13, marking a $7.040 swing in exactly one month. Friday’s settle marked a five-month prompt month low for a close. The last time a prompt month settled lower was Aug. 9, when the September contract closed at $8.649.

Those that did predict the market would do something on Friday expected to see a bounce higher due to short-covering ahead of the long holiday weekend. “I kind of expected that we would see some sort of short-covering rally sometime on Friday, but it never really materialized,” said Steve Blair, a broker with Rafferty Technical Research in New York. “I thought a combination of colder temperatures forecast for the weekend along with traders not wanting to go home too short would have resulted in a little bit of a bump, but it really wasn’t there.”

Blair noted reports from the Nymex floor Friday that the ranks were a little thin, so he hypothesized that some of the locals may have extended the holiday weekend. “The fact that futures are continuing the recent downtrend just goes to show that everybody is very comfortable with where storage is and the fact that we have such warm weather,” he said. “Storage levels are back basically on par with year-ago levels, and we are still a couple of hundred billion cubic feet above the five-year average.”

Looking at support levels, Blair said he had $8.670 penciled in as an important mark. “We held above that on Friday. If we had a close below it, then we could expect another move down to the next support zone.”

Commenting on some of the speculation that major support doesn’t exist until the $6 region, Blair said he thinks it would be difficult for the market to shed another $2 here, alluding to support from the petroleum sector. “Another piece to the fundamental picture is the price of natural gas in relation to crude and heating oil futures. The current crude futures price equates to a natural gas price around the $10.60 level. Likewise, current heating oil prices are equivalent to a natural gas price well over $12. Natural gas is obviously very cheap when compared to crude or heating oil, so we have to keep an eye on that.”

Tom Saal of Commercial Brokerage suggests that economic principles are becoming increasingly important for natural gas buyers. He cites comparisons of marginal value, the current Nymex spot price and the marginal cost of stored natural gas — the weighted average cost of gas placed into storage from the 2005 storage season — as highly important. Economic principles indicate that natural gas storage operators as a general rule will not sell below marginal cost.

According to Saal’s figures, marginal cost stands at $8.675 per MMBtu, and historical analysis shows that “price reverts to cost during the winter months,” Saal reported in a recent memo to clients. With February settling at $8.791 on Friday, $8.675 constitutes a “buy” signal consistent with Saal’s analysis.

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