Keeping downward pressure on natural gas futures prices despite the burst of cold into eastern regions, traders on Friday pushed November natural gas lower for a third consecutive session, dropping the contract 80.7 cents, or 12.5%, over the last three days of the week. The prompt month closed 12.3 cents lower Friday to close out the week at $5.659, which is 76.8 cents lower than the previous week’s close.

Despite Friday’s cold temperatures through the Midwest and a number of eastern markets, traders largely discounted the freeze in favor of burdensome supplies. Even as Buffalo saw its snowiest October day with as much as two feet of snow falling upon the city by Friday morning, market watchers were more interested in the long-term winter prognosis.

“If you were to analyze this market in one sentence, I think there is still too much gas in storage and not enough weather,” said Tim Evans, an analyst with Citigroup. “You also have to remember that a warming trend normally follows every cold snap. Following the cold of late last week, the temperature forecast for this week is not bearish, but it is certainly not very supportive either. The other thing to keep in mind is the near-record level of storage. Even if injections decline over the next couple of weeks, does it really matter if the end of season peak is 3,520 Bcf or 3,550 Bcf?”

Current working gas in storage levels of 3,389 Bcf are just shy of the 3,467 Bcf in storage at the end of October 1990 and the all-time record posted at the end of November 1990 of 3,472 Bcf.

Evans also pointed out that winter weather forecasts appear to be calling for a warmer than normal season due to developing El Nino conditions in the Pacific Ocean. “If these forecasts hold up, it does not appear that we will have the strong heating demand we would really need to draw down the storage surplus,” he said.

Looking at the market’s near-term direction, Evans said he still sees some room to the downside. “The latest open interest report shows that open interest is up basically 50% over the last 12 months and I can tell you they are all not making money,” he said. “I think between now and the November expiration we are still going to be building storage, not withdrawing. While we are still building, I think the downside is still vulnerable. It will be even more vulnerable if we get mild temperatures for the last week of October.”

Another top analyst agreed that a mild winter may set the stage for further price declines. “It all ties to weather, and if the weather turns out mild for the winter, then we are just at the early stages of a market downtrend,” said Bill O’Grady, vice president at AG Edwards in St. Louis. He pointed out that the January and February contracts had just recently fallen below $8, and those contracts will fall close to current spot prices in the $5 range if weather conditions don’t improve for the bulls. “In fact, prices could fall even further, for at present there is some demand for storage but that will dissipate after the end of October.

“The risk you take is that the long-term forecasts turn out to be wrong, and that would not be the first time,” he said. “Using climatological data to predict the future is tough. You are dealing with a mathematically chaotic environment.”

The futures market’s premium over the cash market is also of relevance as it has been fluctuating over the past week. According to NGI’s Daily Gas Price Index, gas for spot delivery to the Henry Hub Oct. 7-9 finished at $4.400, while November natural gas futures on Oct. 6 closed at $6.427, putting the premium at $2.027. During the week, the premium was down to a low of 50 cents. However, gas for spot delivery to the Henry Hub Oct. 14-16 finished at $4.300, or $1.359 below November natural gas.

“November could trade below the cash, but probably would not stay there very long. If the cash market deteriorated further, then November would follow,” O’Grady said. As volatile as the November contract has been, “the greatest downside potential is in the deferred contracts,” the analyst suggested.

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