Natural gas futures on Tuesday fought to take back some of their Monday losses, but failed to scale the psychological $6 level. After reaching $5.99 just before 1 p.m. (EST), February natural gas retreated to settle at $5.902, preserving an 11.2-cent gain on the session.

With any form of lasting cold weather in the East nowhere on the horizon, a number of market watchers still expect the downtrend to continue. Natural gas was helped higher on Tuesday by impressive gains in the petroleum complex. February heating oil and crude futures recorded 5.44-cent and $1.79 gains to close at $1.2466/gallon and $43.91/bbl, respectively.

According to the latest Commitment of Traders (COT) report by the Commodity Futures Trading Commission, noncommercial traders on the New York Mercantile Exchange continued to increase their net short positions for the week ended Dec. 28. The report, which came out on Monday due to the New Year’s Eve holiday Friday, showed that funds were holding net short futures positions of 43,663, slightly higher than the previous week’s 43,092 net short level. By being so short, non-commercials are effectively saying they have raised their expectations that natural gas prices will decline even further.

Commercial Brokerage Corp.’s Tom Saal pointed out that the two other times non-commercials were this short in history, they stayed excessively short for seven-week periods before a covering frenzy ensued.

On only two other occasions has the non-commercial segment held a larger net short position. During November 2003, the non-commercial traders held a peak net short futures position of 52,684. The record was set in January 2002, when non-commercials held a peak net short futures position of 62,643. This leads some to suggest that the market possesses a great deal of pent-up potential buying power.

Saal said the first two major net short periods were “major league buy signals.” He explained that the first two times that non-commercials were significantly net short, they stayed more than 40,000 contracts net short for seven weeks before covering those shorts. In both previous instances, once the non-commercials began to buy, the natural gas spot prices went significantly higher. From February 2002 to February 2003 as the non-commercials covered their shorts and went net long, natural gas spot futures prices rebounded from a $1.85 low to a $10.10 high.

During this current net short run, Saal said non-commercials have only been over 40,000 net short contracts for two weeks. From a fundamental perspective, things are “very bullish” because funds are “too short,” he said.

Looking to the natural gas storage report to be released Thursday morning, estimates on the withdrawal number have been wide-ranging, as the mild weather adds confusion.

For the week ended Dec. 31, Lehman Brothers’ Thomas Driscoll said he is looking for a 160 Bcf withdrawal. “We have reduced our storage withdrawal estimate by about 15 Bcf to reflect weaker natural gas demand related to the Christmas holiday,” he said. “The fact that Christmas was on a Saturday this year could mean that the demand losses were less than normal.”

IFR Energy Services’ Tim Evans said he sees a withdrawal of 110-120 Bcf. “If not for the need to drain storage, the weather data alone implies something closer to 85-90 Bcf, so it could well be even more bearish,” Evans said. “Price can bounce along the way, but without the threat of severe cold, we think the major trend will remain down.”

Citigroup’s Kyle Cooper is calling for a withdrawal between 154 and 144 Bcf. “Considering the holiday, this would be considered a bullish report on a temperature-adjusted basis,” he said.

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