With traders returning from the long holiday weekend, the bearish move still appeared to be intact Tuesday as natural gas futures prices continued to tumble. After opening under $11 at $10.750, February natural gas managed no higher than $11 before settling at $10.626, down 59.9 cents on the session.

Of more importance Tuesday was the fact that the Hurricane Katrina gap from Aug. 29 was penetrated. The $10.600 low on Tuesday broke below the $10.650 level, which marks the top of the gap on the perpetual chart. The gap runs from $10.075 to $10.650.

“Looking at the larger picture, the hurricanes set up an expectation that we were going to run short on gas supply this winter,” said Tim Evans, an analyst with IFR Energy Services. “Despite losing over 560 Bcf in production through last Thursday to the storms, we haven’t seen the corresponding hole in our storage levels. The market’s recent price fall is verification that at the very least, the impact of the hurricanes was less than feared, temperatures are not as cold as were expected and it looks like we will make it through the winter after all.”

Evans said the $10 level looks like a potential short-term objective. “I think the market technically is looking to retest a breakout from a prior resistance level, which might be that $10 even area,” he said. “This was the general price point where we had peaks from February 2003 and December 2000.” Alternate objectives include the $9.20 high from October 2004 following Hurricane Ivan or the April 2005 resistance at $7.85, which is where the larger uptrend really began.

Coming into Tuesday’s action, traders were looking to weather outlooks, paying close attention to whether or not a return to winter’s cold temperatures was in the cards.

“While there is always the potential for the weather outlook to shift over the course of a holiday weekend, that doesn’t appear to be the case this time,” said Evans. He noted there is some potential that this warming pattern could “stick around” for a little while.

“We’ve got a consistent bearish picture between the current temperatures, the forecast temperatures and the likely smallish storage report this Thursday,” he said. “The only supporting factor I see right now is the petroleum futures sector, which has been climbing. However, I think the strong petroleum and weak natural gas dynamic actually reinforces the bearish case of natural gas. While February crude was up $2.10 on Tuesday, February natural gas was still able to drop 59.9 cents, highlighting the resolve of this natural gas move.”

Although it may be slow to develop, one forecasting firm said change in the medium-range weather outlook is on the way. According to AccuWeather, high pressure will lift the jet stream over the western states, allowing it to dip down to the south in the East. This will result in the return to more winter-like temperatures east of the Mississippi and a break in the wet weather out West. The forecaster noted that “the cold weather in the East will not be as frigid as what we saw early in December, but rather a turn to more seasonable temperatures for early January.”

However, the National Weather Service (NWS), in its most recent six-to-10 day forecast, shows above normal temperatures for Jan. 9-13 over a vast majority of the country, with only the coast of California, southern Georgia and Alabama and all of Florida displaying normal temperatures for this time of year. According to the NWS, the only U.S. land to see below normal temperatures for the period will be northern Alaska.

Meanwhile, the spate of mild temperatures is prompting analysts to review their storage forecasts. “As a result, the market is being forced to price in some bearish storage figures for at least the next three storage reports, beginning with this week’s numbers that could post a withdrawal as small as 50-60 Bcf,” asserted Jim Ritterbusch of Ritterbusch and Associates. He added that while a possible shift in the temperature forecasts back toward the cold side is inevitable, the market’s response to such changes will lessen as the winter proceeds.

The change in the weather outlook has not been lost on funds and managed accounts as they continue to press the short side of the market. On Friday the Commodity Futures Trading Commission reported that as of Dec. 27, noncommercials held a net short position of 42,449 (futures only) contracts, an increase of almost 7,000 contracts from the 35,547 net short position of Dec. 20. On Dec. 20, the spot January contract settled at $14.080, but the spot February contract on Dec. 27 finished over $3 lower at $11.022.

Due to the New Year’s holiday weekend, the Department of Energy said the petroleum inventory report again will be released at the same time as natural gas on Thursday morning at 10:30 a.m. EST.

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