Warmer temps allowed natural gas futures values to trickle a little lower on Wednesday, but traders are more than aware that winter is far from over. The February contract on Wednesday closed at $5.496, down 6.1 cents from Tuesday’s regular session finish.

“I’m not surprised we’re testing some lower values here. Look outside at the weather in most regions,” said Steve Blair, a broker with Rafferty Technical Research in New York. “In addition to the National Weather Service, a lot of private forecasters are calling for above-normal temps to continue in the near term in the Northeast, the Great Lakes and the Upper Midwest. I also think this market for some reason has an affinity for the $5.50 level. I’m not sure why, but there was a lot of activity late last week in the $5.50 strike in options.”

While the warm-up explains why prices have backed off the $6.108 high for the move, Blair said the bottom of the market has not fallen out because traders know this isn’t winter’s last rodeo.

“There is still plenty of winter left. If this warm-up occurred a month from now, then the market would definitely be heading lower with more conviction,” he said. “However, we’re still in mid-January, so traders have it in the back of their heads that another extended cold streak could be in the cards. Traders are especially aware as we’re coming off the first extended winter stretch of brutal cold in a number of years. We also are not heading to lower futures values with a passion because we’ve chopped away a lot of the year-on-year and year-on-five-year storage surplus. I think the market knows it would not take a whole lot more cold to erase these surpluses entirely, especially if we see another big draw Thursday morning.”

Turning attention to the Energy Information Administration’s natural gas storage report for the week ending Jan. 15, the industry is expecting a withdrawal of about 200 Bcf to 250 Bcf to be revealed Thursday morning at 10:30 a.m. EST.

A Reuters survey of 23 industry players produced withdrawal expectations of 202 Bcf to 253 Bcf with an average pull expectation of 229 Bcf. Bentek Energy said it is expecting a withdrawal of 250 Bcf, which would bring inventory levels to 2,602 Bcf. The research firm expects that the East Region withdrew 136 Bcf while the Producing Region drained 93 Bcf and the West Region removed 21 Bcf.

“The estimated 250 Bcf withdrawal is the sixth highest single-week withdrawal, but when combined with last week’s reported 266 Bcf withdrawal, the total 516 Bcf draw is the highest two-week withdrawal on record,” Bentek said in its weekly storage outlook. “The second highest two-week withdrawal of 483 Bcf occurred [during] the first two weeks in February 2007.”

Blair noted that the 266 Bcf draw reported for the week ending Jan. 8 could have been larger if not for increased liquefied natural gas (LNG) imports. “There were rumblings last week that the storage draw could have been a record if it wasn’t for the increased LNG imports,” the broker said. “In talking to a couple of my utility guys, they note that as every week goes by, more and more LNG comes into the United States. Without those imports, the storage draw could have blown away the 274 Bcf one-week record withdrawal that was set for the week ending Jan. 25, 2008.”

Some top traders see natural gas futures as fairly resilient in light of the change in weather forecasts to milder conditions. “We still view the market action thus far this week as somewhat impressive as updated temperature views extending above-normal trends have failed to trigger an assertive influx of fresh shorts into the market,” said Jim Ritterbusch of Ritterbusch and Associates. He noted that large speculative accounts are “still sitting on a huge net short position [and] are likely to be selective in establishing fresh bearish strategies. In other words, we don’t expect the speculators to press the market aggressively below the $5.50 level. Instead, they will likely await price advances back up into the $5.75-6.00 zone before establishing additional shorts,” he said.

Economy watchers were not particularly happy with the 8:30 a.m. EST release of data on housing starts. Expectations were that the Commerce Department would report annual housing starts for December of 579,000, up from November’s 574,000, but the actual figure came in at a disappointing 557,000. Back in June 2008 when the economy was humming along in high gear and spot natural gas futures traded consistently over $13, housing starts were at an annual rate of more than 1 million.

Data on manufacturing producer prices was closer to what traders were looking for. Expectations for the 8:30 a.m. EST release of the December Producer Price Index (PPI) by the Labor Department were for no increase from November’s food- and energy-driven 1.8% surge. The actual figure was 0.2%. The core PPI excludes food and energy and the November figures were a gain of 0.5%, and December was expected to show a 0.1% gain. The December actual figure was 0.0%.

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