February natural gas was tackled for a loss Tuesday as traders recited the same causative factors of unsupportive weather and a storage surplus that refuses to stop growing. At the close February had given up 18.2 cents to $2.488, which is the lowest front-month settlement since March 5, 2002.

The March natural gas contract fell 18.5 cents to $2.528, while February crude oil added $2.01 to $100.71/bbl. February’s low trade of $2.439 is just 3 cents more than the $2.409 long-term support posted in September 2009.

“It’s still the same scenario. There are mild temperatures throughout the country and nothing real, real cold,” said a New York floor trader. “There was a little bit of cold, but I think we might level off here for a couple of days and maybe get a little pop with the market trading back up to $2.60.

“Maybe a 10-cent to 15-cent correction higher, then [we] come back down to $2.50 before the market gets hit next week if we don’t get any change in the forecast. [We may] possibly trade $2.25. “I think the shorts are set in and forcing the market [lower] a little bit, and as the market comes off we’ll see a little covering across the board. I think that’s what we may see in the next day or two.”

The storage surplus, however, looks to still be increasing. Last Friday John Sodergreen in Energy Metro Desk revealed the results of a survey of traders and analysts for this week’s inventory report. From a sample of 13 he had a range of a 68 Bcf draw to a 100 Bcf draw with an average 81 Bcf. Last year a whopping 228 Bcf was pulled and the five-year average is at a 162 Bcf decline.

Directional traders were not unanimous in their expectations of lower prices as shown in the Jan. 10 Commodity Futures Trading Commission Commitments of Traders Report. Managed money at the IntercontinentalExchange overwhelmingly reduced long positions and added to short holdings whereas traders at the New York Mercantile Exchange more concerned with the market’s next move rather than hedging a physical position aggressively added to both short and long contracts.

At IntercontinentalExchange long futures and options (2,500 MMBtu per contract) fell by 38,705 to 389,964 and short contracts rose by 18,211 to 239,283. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by 35,432 to 186,457 and short positions grew by 30,154 to 290,168. After adjusting for contract size long contracts at both exchanges increased by 25,756 and short positions rose by 34,706.

For the five trading days ended Jan. 10 February futures dropped 5.2 cents to $2.941.

Analysts have no ready answer for when a meaningful supply response might kick in to bring supply and demand into better alignment. “The big question has been and continues to be: ‘How low does this market have to go to stop or slow drilling and get producers to shut in?'” said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm. “Time will tell, but it seems like we are getting closer to the level every week.”

DeVooght sees nothing new in the mix of aggressive production and unseasonable weather. “The market continues to be pressured by the same news: too much production relative to demand and a lack of deliverability to new markets. On a trade basis, we will continue to hold current positions. We are monitoring the market closely for any decent reason to start to take a long position. As the market drops and approaches levels we believe will start to shut down production, long trades start to look more attractive. We are not there yet but getting closer.”

DeVooght advises both trading accounts and end-users to liquidate short February $3 put options should February settle below $2.60. Producers and physical market longs should continue to hold the remainder of a strip consisting originally of $4.75 November-March put options offset by $7 calls for a 16- to 20-cent debit.

Forecasters are calling for a very warm six- to 10-day period, but the 11-15 outlook hints at some cooling. Commodity Weather Group in its 11- to 15-day forecast shows the U.S. dominated by normal temperatures north and east of a broad arc extending from North Dakota to Oklahoma to South Carolina. “After Arctic air is flushed across the Midwest and East this week, we continue to see very strong model support for major warming in the six-10 day, which is essentially the very warm 11-15 day from last Friday’s forecast,” said Matt Rogers, president of the firm.

“The best chances for strong above-normal temperatures are in the first half of next week (Midwest, East and South). Record warmth could be frequent during this period. But then the models start to offer some changes for the 11-15 day. As usual, the American models are probably too fast and too cold. We favor a very cautious, gradual cooling trend for the 11-15 day with some southern storm chances and a slow trend toward more ridging in the Greenland area (-NAO) [North Atlantic Oscillation].”

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