After a one-day price hike, natural gas futures slid back down to early week levels Wednesday as traders chose to ignore a rally in crude oil and sided instead with bearish intermediate-term weather forecasts. The March contract closed at $6.109, down 6.6 cents for the session and well within the market’s recent $5.95-6.48 trading range. By comparison, March crude notched new three-week contract highs and settled at $48.33 per barrel, up $1.07 on the day.

According to the latest medium-range weather forecasts released Wednesday by the National Weather Service, mostly normal temperatures are expected for the eastern half of the nation for the end of February. The only exceptions include a swath of above-normal air expected in parts of the Mid-Atlantic during the period and a parcel of arctic air that is expected to bring chillier-than-normal temperatures to northern New England.

Although the weather news released Wednesday was nearly unchanged from earlier forecasts, it served to reinforce the idea that the 2004/05 winter is quickly coming to a end. While that may seem to be an undeniably bearish development, few market watchers are ready to call for an immediate collapse in natural gas futures prices.

For starters, there is no clear consensus on if and when there will be a next wave of selling, said ICAP Energy broker Brad Florer. “Support is not a hard and fast number out there,” he said, noting that he perceived there to be sell stops spread over several different price levels. “There is some support at $5.95 and then again at the spot low at $5.71 ahead of the psychologically important $5.00 level..” That being said, Florer does not look for a complete washout. He believes that if prices decline they will do so by drifting lower in an orderly sideways pattern. “Normally you see this sort of pattern in a uptrend,” he noted, referring to the grind-higher then drop-abruptly pattern that typifies most commodity markets.

To answer the question of why prices may continue to slip slowly, but not plummet, you need to look no further than the latest Commitments of Traders report (COT), said a Houston-based institutional fund trader. “I have a bearish book bias in natural gas and it looks like I am not alone. If it were not for crude and products keeping natural gas supported, we would be much lower. Everybody out there is short.”

According to the latest COT report released Friday by the Commodity Futures Trading Commission, both reportable non commercial and commercial traders were net short a combined 34,671 positions as of Feb. 8. The offsetting position is held entirely by the small, non-reportable segment of the market — which includes those who each hold less than 200 contracts. The fact that both the large commercial traders (producers, marketers, end users, etc.) and the large non commercial traders (funds and speculative accounts) are both net-short creates a jittery predicament for natural gas right now, said Nymex local trader Eric Bolling.

“Even though every rally is sold right back down, it feels to me that the upside is more vulnerable than the downside right now. Sure we are range bound, but remember that natural gas has the uncanny ability to become un-range bound in a hurry,” Bolling warned.

In addition to the looming net short position, Bolling is keeping an eye on both the 2005 and 2006 March-April spread. “At [negative 8] cents this year (March 2005 trading under April 2005) the market has all but given up on winter. But the jury is still out on next winter and the March-April 2006 spread at 88 cents (March 2006 trading over April 2006) is evidence of that,” he said.

The ICAP storage options auction completed Wednesday afternoon indicates a 108 Bcf withdrawal for Thursday’s EIA storage report. If realized, a number of that size would be bearish versus a 149 Bcf five-year average and the year ago takeaway of 187 Bcf.

©Copyright 2005Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.