Front-month natural gas futures continued to hover around its five-and-a-half-dollar purgatory on Wednesday as the bears appear to be running out of road while the bulls lack the fuel for a sustained push higher. January natural gas on the day appeared to make a run at the upside with a $5.850 high and the downside with a $5.486 low before closing at $5.619, down 13.2 cents from Tuesday.

The big news continued to come from the crude arena, where the January futures contract reached a low of $39.88/bbl, a four-and-a-half-year low for front-month crude prices. The last time front month crude traded lower was back on July 16, 2004. January crude on Wednesday went on to settle at $40.06/bbl, down $3.54 on the day, despite OPEC’s announcement of the largest supply cutback in history.

As for natural gas, most market watchers believe there is not a whole lot of room left to run to the downside, so they are patiently waiting for the right fundamentals and technicals to line up for a couple of dollars boost to the upside.

“I think there is the chance for the market to find the bottom here and turn back to the upside, but what we need to accomplish that is some combination of three factors,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “We need sustained cold weather, a rebound in crude prices and a tangible decline in natural gas production. If we get those three things working together, then we have a case for a swing back up to a number like $8.

“With Wednesday’s announcement by OPEC that it is cutting production by another 2.2 million barrels per day, I think the fundamentals might be in place for crude to turn around in the near term. That piece of the puzzle for natural gas is already in place,” he said. “On the gas production front, we’ve gone from having a drilling rig count that was well above year-ago levels to one that is down 2.8% from last year, according to Baker Hughes last Friday. Looking out six to nine months, you can already anticipate that the reduced rigs are going to take the edge off the supply side of the market. The only piece of the puzzle that is missing in my opinion is January weather. I’ve seen some forecasts calling for warmer-than-normal temperatures during the month. However, if we end up getting cold instead, we could see a strong push up on prices. We are at a relatively low price level that is 32% below our five-year average price level for this stage in the season. I have to say I am feeling more bullish than bearish here.”

Other analysts suggested that Tuesday’s 10.6-cent gain to $5.751 might be part of a larger dynamic that is signaling that the pervasive downtrend in gas futures might be coming to an end. “Friday’s 20% bullish from ‘Market Vane’ was the most extreme bearish sentiment reading since the $5.192 low in August 2007. This may be the reason the natgas decline has stalled,” noted Walter Zimmerman of United Energy.

For adherents of cycle analysis such as Zimmerman, the question arises whether this may be “bottoming action” and if the Monday and Tuesday gains can still fall within the confines of a bear market correction. If Zimmerman is correct, the market can still rise much higher and still maintain the downtrend the bears covet. “We peg $6.400 [as] pivotal resistance as 0.618 of the $6.978 to $5.458 decline,” Zimmerman said in a Wednesday morning note to clients. He also identified market support at $5.615 and $5.535.

Weather remains supportive. According to meteorologist John Dee, “Temps will be running below average in the western half to two-thirds of the U.S. for the rest of this week and weekend, bringing very high demands for heat to areas like the Pacific Northwest, the northern Rockies and northern Plains.” He added that heating requirements will be “high in most of the Midwest and even into northern New England.”

Turning attention to Thursday morning’s natural gas storage report for the week ended Dec. 12, Evans said he expects the Energy Information Administration (EIA) to report a 100 Bcf withdrawal, but noted that some industry estimates are for a pull in the 120s. A Reuters survey of 22 industry players produced a withdrawal expectation range of 87 Bcf to 129 Bcf with an average pull expectation of 112 Bcf.

Evergreen, CO-based Bentek Energy said its flow model indicated a withdrawal of 121 Bcf, bringing stocks 2.5% below the five-year high and 3.8% above the five-year average. The research and analysis firm expects an 87 Bcf draw from the East region, a 23 Bcf draw from the Producing region and an 11 Bcf draw from the West region.

The number revealed Thursday morning at 10:35 a.m. EST will be compared to last year’s withdrawal and the five-year average withdrawal for the week, which are both 128 Bcf. The EIA, which since June has been reporting storage figures five minutes later than usual to prevent early accessing of the information, will return to its previous 10:30 a.m. EST release time on Jan. 8.

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