January natural gas managed a small gain Wednesday as traders saw an ongoing tussle between algorithmic traders taking profits on short positions matched up against a cadre of willing sellers. At the close January natural gas had risen 2.7 cents to $3.155 and February had gained 2.8 cents to $3.198. February crude oil gained $1.43 to $98.67/bbl.

“Every time the market gets up to $3.21 it runs into a wall of selling,” said a New York floor trader. He added that the market was showing some strength in the spring months and traders were “buying the July and August contracts against a sale of the January and February futures.

“Traders are just decimating demand for the front contracts, especially when its 50 degrees in New York and nothing cool on the way with seasonal and above-average temperatures forward. The market is not going to be in any rush to correct [higher] here, and there isn’t any shot at getting out of this bear cave that we are into.

“I’ve got a nice little range on the [Thursday] storage report showing 93 Bcf to 108 Bcf.”

Last week the Energy Information Administration (EIA) reported a withdrawal of 102 Bcf, about 10 Bcf more than what traders were expecting. Should that happen again, traders will be ready. “With the bullish [withdrawal] numbers a couple of things have occurred. Even [Wednesday] when the market got steadily above $3.135 you did see short-covering, but others were looking to sell any kind of pop,” the floor trader said.

“You might have the black box traders looking to cover, but at the same time people are using any sort of advance to sell the rallies as a hedge opportunity.”

Recent mild weather across eastern and Midwest population centers has prompted estimates of Thursday’s EIA inventory report to fall well short of both last year and historical averages. Last year a stout 181 Bcf was pulled from storage, and the five-year pace is for a 140 Bcf withdrawal.

For the week ended Dec. 16, estimates are just squeaking over the century mark. Analysts at Citi Futures Perspective in New York are looking for a decline of 109 Bcf, but a Reuters poll of 24 analysts revealed a sample mean of 104 Bcf with a range of 93-119 Bcf. Industry consultant Bentek Energy calculates a 101 Bcf pull with equal risk to the estimate both higher and lower.

Bentek said it “considers the 101 Bcf withdrawal to have equal risk to the upside and downside this week.” Withdrawals in the East region increased from last week at the premium Northeast facilities, while decreasing in the Midcontinent. Bentek’s sample in the East region is concentrated in the premium Northeast; therefore, the increased withdrawals in that market may result in an overestimation of withdrawals for the entire region.

“In the Producing Region the sample of salt dome facilities lowered withdrawals by just under 1 Bcf for the week. Less flexible depleted fields decreased withdrawals by almost 3 Bcf. The larger drop in the depleted fields may result in an underestimation of withdrawals in the Producing Region.” Bentek admits that the “large differences in the regional samples from last week has resulted in uncertainty both to the high and low sides of the estimate.”

Analysts saw Tuesday’s modest 3.2-cent gain as a market response to deeply oversold conditions that have pushed prices to two-year lows. “Traders continued to cite as bearish factors continuing high rates of extraction from shale gas fields, abundant storage levels and poor demand. Gas demand is light because of the recession and the cut to baseload consumption,” said Peter Beutel, publisher of Daily Oil Hedger. Beutel sees any buying interest stemming from an improved economy as ephemeral. “[S]igns of economic recovery, like [Tuesday’s] housing starts figure, just do not seem to have much impact in natural gas markets.

“We continue to argue that the bottom line is still in storage. Stocks are 102 Bcf higher than a year ago against a surplus of 41 Bcf (1.07%) a week ago and a surplus of 23 Bcf (0.60%) two weeks ago, and they are now 232 Bcf higher (6.41%) against the five-year average, compared to 224 Bcf higher (6.17%) two weeks ago,” he said in a morning note.

From a technical standpoint, Beutel contends that the market is trying to put in a long-term bottom.

Weather forecasts beyond the first of the year continue to work against the bulls. WSI Corp. of Andover, MA, in its 11- to 15-day outlook predicts above-normal temperatures north of a broad arc extending from Montana to southern Illinois to New England. The remainder of the country is forecast to have normal temperatures. “Above- and much-above-normal temperatures are forecast over the interior western U.S. and most of the northern tier of the country. Anomalies as warm as 10 degrees above normal are anticipated over the north-central U.S.”

WSI said there were no major changes from Tuesday’s forecast and risks to the forecast included “temperatures [trending] warmer over most of the country than currently forecast. Medium-range models all advertise the EPO [Eastern Pacific Oscillation] and the AO [Arctic Oscillation] and NAO [North Atlantic Oscillation] will remain in phases favorable for warm weather over the continental U.S. in early January.”

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