Despite the arrival of colder-than-normal temperatures, natural gas futures continued to probe the downside Friday as an abundance of storage and an expected warm-up in mid-December turned out to be enough to keep the bears on a roll. January natural gas futures closed lower for a fourth consecutive session at $7.302, down 15 cents on the day and 70.9 cents lower than the previous week’s close. The December contract expired Wednesday at $7.203.

The prompt-month contract traded between $7.280 and $7.495 before coming to a close. Traders on Friday were actually calling the natural gas futures market “sane” in comparison with crude futures, which recorded yet another multi-dollar drop on the day. January crude broke below the $90/bbl mark Friday to close at $88.71/bbl, down $2.30 from Thursday’s close and a whopping $9.47 drop from the previous Friday’s $98.18/bbl close. However, some market participants noted that they still view crude futures as less complex.

“I think in some respects this is a little bit of a more difficult market than crude oil. In crude, I am a raging and ecstatic bear, but natural gas is more complicated,” said Tim Evans, an analyst with Citigroup in New York. “In gas we have a year-on-year storage surplus, but it is also trading at a significant discount to the price it held a year ago. On Nov. 30, 2006, the prompt-month contract set a high of $9.050, so we are down around $1.50 from where we were at this stage last year. That might be appropriate in the sense that we have a higher inventory this year, but the question is what is an adequate price discount at this time. I think you want to go with the trend in price here and see where that leads you, but I don’t necessarily feel that we are overvalued in some kind of larger fundamental sense.”

Echoing the common call from traders and analysts alike, Evans told NGI, “Weather is everything here. Last year we had similar conditions to what is forecast this year. We had a stretch from mid-December through the third week of January of warmer-than-normal temperatures. That took us to a low trade of $5.740 and we ended up finishing the year at $6.299. Last year’s behavior suggests that there may be some further downside here, but I would be more comfortable with that idea if I were to see an 11- to 15-day forecast that is consistent for three days in a row.

“There has been a lot of volatility in short-term weather forecasting as of late, especially in the 11- to 15-day range. To some extent, I think it is just the outer limit of what the science can project. Banking on those 11- to 15-day forecasts as a reason for a position in the market is asking to get whipsawed.”

He noted that incoming colder temps might be hard-pressed to lend support. “The natural gas market has some fundamental support in the form of the cooler-than-normal temperatures coming into the Midwest and East over the next few days but is not showing much inclination to rally on that support,” Evans said. “High storage, weak petroleum performance and the expectation that the warming trend to follow the cool temperatures will allow for a further decline are all weighing on prices here. That could change, of course, but we think the market may wait to see what Monday’s updated temperature forecasts look like.”

Traders citing the bearish case were unperturbed by Thursday’s lackluster response to a bearish inventory report. The Energy Information Administration (EIA) reported a 12 Bcf withdrawal, which was less than the 20 Bcf expected by industry observers. January futures fell a modest 3.4 cents Thursday to settle at $7.452.

“Although the immediate response to [Thursday’s] reported 12 Bcf storage decline was muted, the fact that storage is comfortably above the 3.5 Tcf level in late November is an important bearish consideration that will continue to restrict upside price possibilities during the coming weeks,” said Jim Ritterbusch of Ritterbusch and Associates.

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