The trap door remained wide open Tuesday as January natural gas continued to plummet, carving out a low of $10.960 in afternoon trade before closing at $11.022, down $1.261 for the day. The move brings the contract’s three-day decline to $3.249.

The last time the market saw a prompt-month contract trade under $11 was when October futures reached $10.860 on Sept. 15. The $11.022 settle Tuesday was $4.758 lower than January’s all-time high of $15.780, which was recorded on Dec. 13.

The downward spiral was also seen in February futures, which will take over as prompt month following January’s expiration Wednesday afternoon. February natural gas settled at $11.216 on Tuesday, down $1.186 on the day.

A number of traders said the warming spell during the past week has alleviated the pressure surrounding the natural gas supply/demand balance.

“We were saying $10.65 to $10.72 was a target, and I think that is still doable here, maybe in the Access trade session,” said a Washington, DC-based broker. “It is really remarkable how sentiment shifts on reinterpretation of the weather.”

As for the supply/demand equation, the broker said it always comes down to the perception of the situation. “I don’t think anyone argued that we didn’t have a lot of gas in storage, but the question was, would it be enough if temperatures got really cold this winter? Now that many are expecting this warmth is going to be more than just a pause before more cold comes, people have to start to wonder when it will be accepted that this warm spot is more than a blip.”

The broker noted that the $10.65 level is important because it marks the top of the Hurricane Katrina gap on the perpetual chart. “From a technical perspective, a drop below that tells us the bull move is officially over, but what will be important to see is what the market does if we get there,” he said.

“We could also be seeing a ‘measuring gap’ in the charts unfolding. Depending on whether you measure the down move from the $14.50 level or all of the way from the $15.78 high, we could still see significantly lower numbers. Conservatively if you say the move started at $14.50 and we went down $2.50 to $12.00, then this gap opened Tuesday at $11.70, we might be at a midpoint. So subtract another $2.50 from that and we could see $9.20 as a possibility. It’s funny how all of these measurements bring this thing right down to another key level of support.”

As for the market’s next move, the broker said he doesn’t expect buying to come in just yet. “I think the shorts are still trying to max out as much as they can,” he said. “We have all seen them demonstrate before their willingness to press and hold in a position, so I don’t know if we should expect to see short-covering quite yet.”

Enerjay LLC’s Jay Levine said the market is currently in interesting territory. “Call it year-end book squaring, year-end profit-taking, or year-end realization that maybe prices had gotten a little out-of-hand; call it whatever you want but we’re now over $4 off the all-time record highs and still trading $11+. It’s going to be one of those weeks. [Tuesday] is natural gas option expiration. [Wednesday] is natural gas futures termination, a shortened week. Throw in the latest API/DOE/EIA reports and it spells (continued) volatility amidst the holiday season,” Levine said.

The abrupt price slide has top analysts redoing their spreadsheets to accommodate a market that is desperately seeking a bottom. “Although we had been expecting a trading range within the $13.00-15.00 zone through year’s end, the price action of the past three sessions has simply accelerated our longer-term expectations for a decline into the $11.00-13.00 zone,” said Jim Ritterbusch of Ritterbusch and Associates. He added that he looks for this new lower range to “confine the trade into next month when updated forecasts will determine the next major price move.”

Near term weather forecasts do not appear to offer much solace to the bullish case. Although December came in like a lion, it is leaving like a lamb. Forecasts from the National Weather Service show that for the week ended Dec. 31, a below average accumulation of heating degree days (HDD) can be expected in key energy markets. The populous states of Pennsylvania, New York and New Jersey are predicted to receive 186 HDD or 63 below normal. The large Midwest states of Ohio, Indiana, Michigan, Illinois, and Wisconsin are anticipated to endure 211 HDD or 71 less than normal.

Meteorologists explain that a shift in the jet stream has caused conditions to moderate. “The arctic has been sealed off and thumb-numbing cold will remain far to the north and storms will bring more rain than anything else,” says John Kocet, meteorologist with AccuWeather. He added that the flow across the Pacific is so strong, the jet stream is splitting in two over the eastern Pacific much like water spraying out of a hose. One branch cuts north through Canada, while the other is directed across the United States. “As long as this pattern persists, frigid arctic air will remain well to the north, and that takes us through this week anyway.” forecasted Tuesday that some south-central states could produce record setting warm temperatures for this time of year. “The mild weather also envelops the Southeast and even the Northeast. After enduring subfreezing weather for much of the first half of December, residents of the Northeast have been enjoying a mild spell since winter’s official arrival on Dec. 21, with temperatures more than 10 degrees above normal forecast through this week,” said.

Funds and managed accounts have added to their well-established short positions. The Commodity Futures Trading Commission reported Friday that noncommercials held a net short (futures only) position of 35,547 contracts as of Dec. 20. This represents an increase of 6,521 net short contracts from Dec. 13, when the spot January contract settled at $15.378. On Dec. 20, it had fallen to settle at $14.080.

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