After absorbing the sizeable 230 Bcf natural gas storage report pull on Thursday without spiking, March natural gas futures used Friday to explore lower in search of support. Keeping within a tight 15-cent range, the newly minted prompt month hit a low of $6.15 in morning trading before settling at $6.259, down 9.3 cents on the day and less than a cent lower than the previous Friday’s settle.

Despite recording a decline on the day, the losses for natural gas came nowhere near the sell-off levels experienced by crude and heating oil futures. February heating oil settled down 5.89 cents at $1.3380/gallon, while March crude closed $1.66 lower at $47.18/bbl.

The Commodity Futures Trading Commission’s Commitment of Traders (COT) report released Friday revealed that the noncommercial traders have finally started to reel in their net short positions. As of Jan. 25, noncommercials held a net short position of 45,653 contracts, down 9,837 from the Jan. 18 peak of 55,490. During that period, March natural gas futures increased 28.6 cents, proving the idea that the trading activity of noncommercials is a good indicator of price direction.

IFR Energy Services’ Tim Evans said natural gas prices probed the downside early in Friday’s session but may not have been able to break the equilibrium in that direction either, preserving the character of a two-way market for the meantime.

“We don’t think that’s the last of the downside tests though, as the overall moderation in temperatures this week has us thinking next week’s DOE report may show a smaller 200 Bcf net withdrawal,” the analyst said. “This would still better the 182 Bcf five-year average decline, chipping something off the year-on-five-year average surplus, but would leave an overhang of some 250 Bcf for the balance of the season.”

Evans said that because temperatures are forecast to rise above normal next week across the northern U.S., the drain on storage will shrink proportionally, putting pressure on prices. “The market may not have broken its recent equilibrium just yet, but the fundamental pressure is still very firmly suggesting that it do so, and do so on the downside,” he said.

Other traders believe prices are currently stuck in a range. “Despite the larger-than-normal storage withdrawal Thursday, the supply surplus remains quite comfortable, particularly in view of mild temperature forecasts through early February,” said a Midwest analyst. He suggested that this factor is tending to keep a lid on price rallies, while downside price reactions are still being limited by a lack of interest on the part of funds and managed accounts to increase an already large short position. “As a consequence, this holding pattern, that has been intact for most of this month, could easily remain in effect well into February,” he said.

According to other traders, storage is still the primary price-determining force and it is expected to ultimately cause prices to fall. “I don’t think weather is all that important and what is driving the market is storage,” says Warren Tashnek, vice president with Fimat in Houston.

He said there is way too much storage gas, and the market currently is just in a big range. “It looks like the bulls are running out of time. The withdrawal of 230 Bcf was a large number and traders still couldn’t push the market higher,” he said. “Attempts are made to bring weather into the equation, but that has little impact as well. Fundamentally I am very bearish, but technically the market has been in a consolidation pattern and is waiting for the other shoe to drop. I expect a technical breach of the consolidation pattern with prices falling lower. It’s not a question of if the market will break out of its current technical consolidation pattern, but when. I don’t know what the catalyst will be to drive prices lower, but you just have to pick your (trading) point and be patient.”

Traders are also keenly aware of the tangential relationship of the petroleum complex. “The fundamentals of crude oil are more supportive, and natural gas is drafting off that market to some extent,” said a Houston broker. He said crude oil is more of a psychological supporting factor, but nonetheless traders will be watching weekend OPEC developments.

OPEC meets on the same day as the Iraqi elections. It is slated to decide on proposed production cuts to prevent any seasonal decline in prices this spring. OPEC’s production target is 27 million bbl/d, and the group agreed in December to trim output exceeding that level, saying the 10 members restricted by quotas, excluding Iraq, would remove 1 million bbl/d from world markets to bring production down to the 27 million bbl/d level. The consensus is that there will be no production cuts because of the current elevated level of oil prices. Also, Saudi Arabia holds all the cards and is not receptive to reducing output, sources say. The organization holds its next meeting in Iran on March 16.

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