The tug-of-war between natural gas futures bears and bulls continued into December on Tuesday as the January contract traded in a 23.2-cent range between $4.659 in the morning and $4.891 in the afternoon before closing out the regular session at $4.762, down 8.6 cents from Monday’s finish.

The front-month contract’s combined 43-cent decline on Monday and Tuesday has now completely erased the 42.6-cent run-up in values last Wednesday and Friday. Some market watchers explained the back-and-forth trading action as a result of changing weather forecasts and on how the market behaves in a reduced-volume holiday atmosphere compared to a regular trading day.

“Some of the forecasts went from much below average to just below average, so that combined with a more robust trading community this week gave the impetus to beat futures values down a little more,” said a Washington, DC-based broker. “However, this thing can’t yet be declared a bear market. We are still tracking this thing as being in its fifth and last wave higher under the Elliott Wave theory. Obviously, we could be wrong and we could continue to head lower, but that remains to be seen.”

The broker noted that the Energy Information Administration’s 914 data released Monday wasn’t very supportive. “Yes, there was a reduction in onshore gas production, but it wasn’t quite what the bulls had been hoping for. The data told a little bit of a bearish story. Despite all of these rigs being laid up, there is still plenty of gas coming out at a time when we don’t need it. The bulls had been hanging their hat on the anticipated sizeable reduction in production figures, but each month it fails to materialize.”

On the other side of the coin, the bears are not faring much better, the broker said. “Noting record storage, a mute Atlantic hurricane season and lack of cold temperatures, the bears would like to label the recent rally ‘bologna’ and cram this price back down to $2.500, but no one is willing to make that bet either. One of the cases out there for not slumping to the lows is that producers are not selling. Were the producers so scared when we were down at $2.400 that they hedged ahead of schedule to cover themselves? That argument would have the producers overhedged at this point and not looking to sell any more at this time. That could be responsible for why we’re holding up here.”

Looking into the winter months, it would appear the healthy storage situation will likely keep a cap prices from going too high. Stephen Smith of Stephen Smith Energy Associates said using his base case price outlook through February 2010, he expects a natural gas storage level of 2,546 Bcf as of Jan. 29, which would represent a surplus of 837 Bcf versus 10-year storage norms, as compared with a 489 Bcf surplus one year earlier. Under this scenario Smith said he expects a likely February 2010 Henry Hub bidweek price range of $4.50-5.50/MMBtu.

Looking more near term, the analyst said his weekly supply/demand model projects a storage build of 1 Bcf for the week ending Nov. 27. “This compares with a normal seasonal draw of 74 Bcf (based on 1994-2003 norms),” he said in his weekly research note. “The net effect would be a 75 Bcf increase in the storage surplus versus 10-year norms, to a surplus level of 975 Bcf — versus a surplus of 508 Bcf one year ago.”

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