After erupting to a new high for the week on the heels of an undeniably bullish inventory report Thursday morning, natural gas futures dropped to a new low for the week Thursday afternoon as traders priced in the latest forecasts calling for mild weather for the first quarter of 2003. The January contract took the selling squarely on the chin, dropping nearly 44.3 cents off its high for the day and 23.1 cents off Wednesday’s close to finish at $5.047. In doing so, it settled beneath the February 2003 contract ($5.073) for the first time.

According to the Energy Information Administration, working gas in storage dropped 159 Bcf to 2,635 Bcf for the week ending Dec. 13. Although the withdrawal was slightly below last week’s 162 Bcf pull, it came in at the high end of the 110-160 Bcf range of expectations. Versus historical comparisons, it was no contest. During the same week last year, the market pulled a paltry 43 Bcf from the ground and the five-year average is a withdrawal of 90 Bcf. Storage is now 560 Bcf less than year-ago levels and 151 Bcf less than the five-year average.

Despite the undeniably bullish hue to the storage report, the market’s reaction was somewhat restrained by late morning Thursday. Last Thursday the market tacked on a healthy 38-cent rally following the storage report. “We continue to see some consolidation,” explained Ed Kennedy of Commercial Brokerage Corp in Miami Thursday morning when the market was trading in the high $5.30s. “Don’t get me wrong, the storage report has a bullish cast to it and if we get a close over $5.53, we will see a big move higher, but right now the market is still stuck in a range,” he said, adding that buyers are a little tentative ahead of the holidays and there are no buy stops below $5.53.

As it turned out, Kennedy’s words were somewhat prophetic because the market fell dramatically from the $5.39 level. An hour later at 12:30 p.m. EST, the January contract was 34 cents lower at $5.04.

However, it didn’t take a prophet to figure out why gas futures dropped so far so fast. According to the latest 30- and 90-day outlooks released by the National Oceanic and Atmospheric Administration Thursday, above-normal temperatures are expected over the northern half of the country straight on through March 2003. The forecast is consistent with a moderate El Nino condition, which results in a westerly flow of air into Canada, decreasing the likelihood of arctic air finding its way into the continental U.S.

Although January broke beneath Wednesday’s $5.10 floor, it remains in a bull flag continuation pattern. More psychological support at $5.00 could stem the selling. If not, failed channel resistance at $4.91 will come into play, said Tim Evans of IFR Pegasus in New York. Evans looks for another upturn and is considering using a $5.33 buy stop to enter the market on the long side. A $5.08 sell stop would limit his loss.

As previously announced, during the weeks with the Christmas and New Year’s holidays, the Weekly Natural Gas Storage Report will be released between 10:30 a.m. and 10:40 a.m. Eastern Time on Friday.

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