Analysts see the natural gas market temporarily stymied by the holiday season and end-of-the-year book squaring. Once trading rosters are up to pre-holiday levels, price movements will have more significance, they say. Holidays or not, January futures shed 11.3 cents to $5.669 Monday and February dropped 11.7 cents to $5.712. The expiring January crude oil contract fell 89 cents to $72.47/bbl.

“We got up to $5.91 [Dec. 17] and it looks like we’ve hit the wall for the time being,” said Brian LaRose, analyst with United-ICAP. “I don’t know if we should chalk [Monday’s decline] up to a trend that has ended or the fact that traders are on vacation and closing their books. Our trading floor is very quiet, and I suspect that will be the case through the end of the year. I think day traders will move the market around for the short term, and after that we will see if we can push through $6.

“If we can hold the $5.35 to $5.40 area, there is a chance for a substantial retest of $5.95 to $6.25 area, and $5.38 is my pivotal support area. At the moment I am a little bit cautious as to viewing any pullback or any price action this week as significant, but the only thing that looks significant at this moment is the U.S. dollar breaking out to the upside. If that is the case, I would be leery of holding any commodity of any kind for any length of time. The longer-term trend is for deflation and I would rather be building a short position [in commodities] rather than length given what the dollar has been doing.”

LaRose admitted that the natural gas market was largely independent from moves in the dollar, but “if overall deflation is the economic risk, and since the fundamental factors have been major drivers in the price decline, those fundamental factors will fully show [in a deflationary environment] that there is still no demand for natural gas.”

Other traders see the year-end period as volatile if not unrepresentative. “It is our feeling that a large part of the rally in the gas market over the past couple of weeks has been because of liquidation of the most popular trades of the year [short natural gas, long crude oil]. There might be more to come between now and year-end, but after the first of the year we feel there is a very good chance that the gas market will make another run at the lows,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

It is DeVooght’s contention that there has been some positive economic developments, but “just stabilization is not going to be enough to turn the gas market into a bull market. On a trading basis, hold current positions, but with the upcoming year-end book squaring be prepared for a lot of volatility,” he said in a morning note to clients.

DeVooght currently advises trading accounts and end-users to stand aside, but producers and other physical market longs should hold on to the remainder of a 12-month $5-8 collar that was initially begun in August at a cost of 35 cents. In addition, DeVooght suggests holding on to a 12-month $5.50 put and short a 12-month $7.50 call that was first initiated with the December contract.

The case for the upward surge in prices being led by fund and managed account short-covering got additional traction Friday with the release of government data. The Commodity Futures Trading Commission reported that managed money still favored the short side of the market but with less exposure. For the week ended Dec. 15, funds and managed accounts increased their combined long futures and options positions by 128 contracts to 119,791, but short contracts decreased by 12,952 to 154,904. For the five trading days ended Dec. 15 January futures rose 40.9 cents to $5.523.

Weather forecasts have backed off only slightly in their call for continued cold. “The forecast is warmer overall today through the Midwest and South,” said MDA EarthSat in its six- to 10-day morning energy outlook. It said early cold in the wake of a strong storm system looks a bit less intense compared to late last week and may not last as long as previously anticipated. “That being said, this period is still quite cold nationally, especially through the Midcontinent.”

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