Front-month natural gas futures recorded a two-month low on Friday and threatened to take out what some market watchers deem as significant support down at the $5 price level. The March contract reached a low of $5.008 before closing Friday’s regular session at $5.044, down 12.8 cents from Thursday’s finish.

Traders remained a little perplexed as values continued to fall a day after the market received word that nearly 200 Bcf had been removed from underground storage for the week ending Feb. 12. While the 190 Bcf pull had been expected by the industry, such a reduction was significant in its own right. Over the course of Thursday and Friday the front-month contract plummeted 34.2 cents.

Since early December front-month futures have been trading back and forth within roughly a dollar range between $5.121 and $6.108. Some traders note that a break below $5 could spell a sea change.

“I think a break of $5 would be pretty significant here,” said Steve Blair, a broker with Rafferty Technical Research in New York. “There’s some support at $4.960, but if we get a close below $5, I think the down side really opens up. There is not much time left in the winter season, so I think some people are looking down the road here. Even if we get a couple more hefty storage withdrawals over the next few weeks, we’re still going to enter the injection season in pretty good shape.”

Blair said there are traders out there who believe prices are headed down to where they were last year, barring any serious hurricane disruptions. “I’m not sure I’m on board yet, but there is talk we could see $2.50 gas again,” he told NGI. “We’ll have to wait and see how the summer heat and hurricane season are shaping up first.”

Although the natural gas market is a North American market and less subject to the vagaries of factors like geopolitics and foreign currency changes, after the markets closed Thursday the Federal Reserve raised the discount rate by a quarter point to 0.75% in a signal that the emergency supply of liquidity to financial markets is done, and the most aggressive monetary policy easing in its 96-year history will eventually reverse.

According to the Fed, the decision was nothing more than a “normalization” of lending that would have no impact on monetary policy, and it also said its benchmark federal funds rate would stay low for an “extended period.” That wasn’t enough assurance for traders who interpreted the rise as a signal the Fed would tighten policy. The dollar rose and U.S. stock futures and crude oil fell after the announcement.

The actions also signal that the Fed feels that it will at some point have to turn its attention to fighting inflation. The 8:30 a.m. EST Friday release of the Consumer Price Index (CPI), however, showed that may not happen anytime soon. The January CPI was forecast to be up 0.3%, but the actual figure came in at a tame 0.2%. Core CPI (excluding food and energy) came in at minus 0.1%, whereas expectations had been for a rise of 0.1%.

Top analysts see only a minimal impact from the interest rate rise. “Although some bearish spillover from the overall commodity space could prompt some selling…we generally look for this market to go its own way. While the increase in the discount rate could carry some bearish implications, the rate hike also provides some testament to an improving economy that should translate to some improvement in industrial offtake over the long haul,” said Jim Ritterbusch of Ritterbusch and Associates.

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