Warm weather forecasts and the large separation between cash andfutures prices spoiled the nice rally futures traders had goinglate last week. Prices opened down a nickel, made slight gains andthen slid the rest of the day. After opening at $2.600, Decemberposted a mid-day high at $2.635 and then collapsed to a low of$2.520. It settled down 12.5 cents at $2.524. January lost 10.7cents to settle at $2.681, and February slipped 8.5 cents to endthe day at $2.640/MMBtu.

“Actually I thought technically we would have tested the $2.515area very early in the day,” said one trader, referring to thenear-month contract. “We just lost leadership. The selling dried upand left the locals short. They covered their shorts and set thehighs, and then it just died.

“The market was on the defensive all day,” he added. “There wasa bit of a rally from Friday’s extremely low prices in cash, up toaround $2.29, but still we’re holding a hell of a premium here onthe December futures from where cash is trading. The path of leastresistance is still down, and I think it’s going to continue to bethat way… We’re just not getting the weather that was forecastand we’re losing a lot of heating degree days here,” he noted. “Themarket is very sensitive to weather forecasts so I’m going to haveto say it will continue like this until at least Wednesday…Eventually winter will show up.”

Despite the current cooling trend in the Northeast, which gave asignificant boost to cash prices at many points yesterday and werebehind the futures run-up on Friday, a new six to 10-day forecastreleased yesterday shows futures bears won’t be enteringhibernation just yet. The revised forecast greatly expands the areaof expected above-normal temperatures to extend from the Rockieseast to the Appalachians and from Canada south to Mexico and theGulf. The new forecast is likely to set the tone for the next fewdays.

At least one source said he feared another week of storageinjections. “We may be trading in the $2.40s before the AGA[storage] comes out. Another weekly injection would not befriendly.” He noted there was plenty of gas in the pipe last weekcausing some pipelines, such as Tennessee, PG&E, SouthernCalifornia Gas and Northern Natural, to issue operational floworders with balancing penalties. “That gas had to go somewhere andit’s quite possible they might have injected some of that gas. Itwill make the storage report very interesting this week.”

Tim Evans of Pegasus Econometric Group noted, however, therestill remain several supporting factors in this market: productionis down compared to last year at this time; there are only minorexpansions in Canadian export capacity planned this winter; and oilprices are $10 higher than they were last winter making gas theheating fuel of choice even at $2.50. Nevertheless, Evans doesbelieve prices will continue lower until winter shows up. “I thinkthe $2.406 low set on Sept. 22 is a good [downside target], andit’s not a bad week for some kind of bottom to be created,” hesaid. “I certainly want to get Wednesday’s AGA report behind usbecause it’s likely to be bearish.

“From a technical standpoint, we’ve seen a little growth in openinterest and I think it’s because some people are getting in totest the short side because the trend in prices has been down. Sothere should be some covering down the road. We’ll have to wait andsee on the Commitment of Traders report this Friday.”

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