Following its recent track record of topsy-turvy moves, December natural gas futures on Thursday and Friday finished out the week with a rebound following a $1-plus drop that was concluded earlier in the week. The prompt-month contract recorded a high of $7.920 Friday before closing at $7.897, up 18.4 cents from Thursday but 52.1 cents lower than the previous Friday’s close.

“It is kind of hard to get bullish with all-time record storage in the country,” said Tim Evans, an analyst with Citigroup in New York. “The argument really starts and ends right there. We are not really incorrectly valued here to any significant degree relative to a year ago.

“We have 99 Bcf of gas more in storage than last year at this time and we finished at $7.897, which is very close to the $7.955 on Nov. 9, 2006. Natural gas futures seem sane when compared to the crude oil market, where prices are close to $40/bbl more than a year ago. You could make an argument that the crude oil futures market is out of line with its fundamentals, but it is much harder to make that case in natural gas.”

After recording a new all-time high of $98.10/bbl earlier in the week and then coming off, December crude futures appeared to be regrouping for another assault higher on Friday. The contract recorded a high of $96.65/bbl before closing at $96.32/bbl, up 86 cents from Thursday.

As a result of the comparisons in the natural gas market between this year and last year, Evans said he views the market with a bearish tint to it. “I am bearish on the natural gas futures market, but not because we have more gas in storage than last year. If the parallel with last year’s price holds, we should see lower prices. We finished 2006 at $6.300, so if we pretty much run on the same rails as a year ago, then there is definite downside risk. Last year we went up from the $7.955 close on Nov. 9 to a high of $9.050, before we fell to $6.300. That was a function of some pretty intense cold in the first two weeks of December. If we don’t get that cold snap this year, then that would count as a bearish development. The weather picture really will call the shots from here on out.”

Top technical analysts suggest that the high in December futures earlier this month may have been the peak of the preseason rally and spot natural gas futures are on their way to what could be a sub-$5 trade during the first quarter of 2008. At the same time, however, they acknowledge that market trends are typically not a one-way street and in the interim a “bear market correction,” or rally, is a distinct possibility.

In Thursday’s trading December futures posted a low of $7.515 shortly after the release of inventory data reporting a widely expected 36 Bcf injection. December then mounted a steady advance to close near the high at $7.713, up 8.9 cents on the day. Technical traders see a possible continuation taking December futures past $8. “If this rebound from Thursday’s $7.505 low is only the bear market correction of the decline from $8.712, then the ideal resistance for the bears is the 0.618 retracement at $8.250 and the must-hold is the 0.7862 retracement at $8.455,” said Walter Zimmerman of United Energy.

Longer term, however, the convergence of major market cycles points to a 1Q2008 price low. “The two-and-a-half-, three- and four-year cycles are all due to bottom in Q1 of 2008. If the seasonal peak is in, there could be quite a seasonal decline,” said Zimmerman. In an Oct. 16 study, Zimmerman cited the average decline from a preseason rally at about 45%. The 45% average has held for five-, 10- and 15-year periods since November 1990. Thus, if Zimmerman’s average decline is correct, and if $8.712 is the end of the preseason rally, spot natural gas futures could decline as low as $4.790 by 1Q2008.

©Copyright 2007Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.