With the five-day-old bearish storage report still fresh in traders’ minds, March natural gas futures on Monday — aided by weak petroleum futures activity — continued to explore lower in search of support, seesawing on the psychological $6 level on numerous occasions during the session before finally settling below it.

Following a late push lower, March natural gas futures notched a low of $5.95 before settling at $5.969, down 12.7 cents. A prompt month has not traded this low since the February contract did so back on Jan. 12 with a $5.83 session low.

March crude and heating oil also blew off a little steam Monday, settling down $1.20 and $0.436 to settle at $45.28/bbl and $1.2306/gallon, respectively.

“With the natural gas prompt month breaking through that $6 barrier, we are probably setting up here for a test of some lower numbers,” said Tom Saal of Commercial Brokerage Corp. in Miami. “We have support at $5.90, then down at $5.71. The question you have to ask is, who is selling this market? It is probably funds and locals.”

Despite falling natural gas futures prices, the Commodity Futures Trading Commission’s Commitment of Traders (COT) report released Friday revealed that the noncommercial traders are continuing to reel in their net short positions for the second consecutive week. As of Feb. 1, noncommercials held a net short position of 30,535 contracts, down 15,118 from the prior week and down 24,955 from the Jan. 18 peak of 55,490.

Historical figures have shown that as the noncommercials exit their net short positions, natural gas futures prices have climbed. March natural gas futures increased 15.8 cents from Jan. 18 to Feb. 1.

On only two other occasions have speculative accounts held such a large net-short position — in late January 2002 (62,643) and then again in November 2003 (52,684). In both instances, the natural gas futures market was in the process of carving out a bottom.

On Jan. 28, 2002 the prompt month notched a significant low at $1.85. In the subsequent months, the speculators would cover their positions and futures would nearly double in value by the end of March 2002. History repeated itself again in November 2003. After extending to a net-short position of 52,648 on Nov. 18, 2003, the noncommercial traders were again heavy buyers, and successful in bidding the market from $4.55 to $7.55 in just three short weeks.

“With the weak fundamentals — winter in its waning weeks — the funds got out of some of their short positions, but I think that they are in the process of re-deploying them for another thrust down,” said Saal. “They may increase their net short positions again as the market continues to fall,” he added, noting that would fit the funds’ normal trading behavior.

Meanwhile, discussion continues over the impact of hedge fund trading. FERC Chairman Pat Wood, CFTC Chairman Sharon Brown-Hruska and Nymex Chairman Mitchell Steinhause recently penned three separate letters to Rep. John D. Dingell (D-MI), ranking member on the House Committee on Energy and Commerce, saying the growing alarm about the impact that hedge funds are having in the natural gas futures market is largely unfounded. (see related story).

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