After climbing to a new two-week high Friday, natural gas futures spiraled lower Monday morning as traders learned that forecasts calling for extreme cold last week have been tempered. Also at work, market-watchers agree, is residual selling following a neutral to bearish storage report released Friday.

The February contract began its slide in the Sunday evening access session. Then, after gapping lower at the opening bell Monday, it was hit by another round of heavy fund and managed account long liquidation in the open outcry session. From its $4.85 low, February rebounded only modestly and ended the session at $4.935, down a whopping 40.9 cents on the day.

Crude oil futures, which slipped a dollar Monday on news that OPEC would look to increase exports as early as next week, was contributing to the weakness in the gas pit.

While the six- to 10-day forecast released Sunday by the National Weather Service called for below-normal temperatures from the Mississippi River East, it also looked for above-normal temperatures over a large portion of the West, prompting some to suggest the eastern cold will be short-lived. Another forecaster contacted Monday, however, downplayed the extent of the expected warming, saying that forecasts issued over the weekend by the NWS are computer-generated and therefore do not make use of meteorologist interpretation which can add in factors (such as the effect of snow cover) not included in the computer models.

As it turns out, a little human intervention did the trick Monday afternoon for natural gas bulls. According to its six- to 10-day forecast released at 3 p.m. Monday, the NWS called for above-normal temperatures only in the Southwestern corner of the country and for a segment of the sparsely populated northern plains. Meanwhile, below-normal temperature were forecast over a protracted area of the country extending from Maine to West Texas.

Last Thursday the market was goosed higher when meteorologist Jon Davis of Salomon Smith Barney released a forecast calling for a “Siberian Express” of cold air to enter the lower 48 states by mid-January (see Daily GPI, Jan. 3). However, that forecast lost some of its punch Friday when it was contradicted by an outlook from WSI Corp. (see Daily GPI Jan. 6). At $4.935, prompt month futures are roughly 15 cents above its prevailing level prior to the flurry of somewhat confusing weather forecasts.

However, weather forecasts were not the only bearish factors Monday. Storage was also deemed a modestly bearish factor. On Friday the market rallied and retraced following the announcement that 123 Bcf was pulled from underground storage facilities during the week ending Dec. 27. Not only was the figure at the low end of expectations centered in the 120-140 Bcf area, it also it also failed to match the 126 Bcf draw down from a year-ago. After being shocked by larger-than-expected withdrawals of 162 and 159 Bcf in consecutive weeks in the beginning of December, the market has been undercut by lower-than-expected, back-to-back reports of 95 Bcf and 123 Bcf in the last two weeks.

And whether the market is soaring or dipping on account of storage or weather, it does not come as a surprise to George Leide of New York-based Rafferty Technical Research. “The volatility is the one thing we can count on and that is why we have called for a wide trading range. The main catalyst is the weather forecasts this morning, which are not as cold as previously thought…. The [storage number] on Friday was moderately bearish as well,” he reasoned.

Technically speaking, Leide sees support down at the $4.83 low, which is just below February’s $4.85 low Monday. “As long as we don’t trade below $4.83 we are buyers down here…. Although I don’t think we will see the $5.11-21 area [Monday], a bounce back up to $4.97 is possible,” he said late Monday morning.

And if the volatility of buying and selling futures outright is too much, an option is to trade spreads,” chipped in local trader Eric Bolling (RBI). “After closing at 27 cents Friday, the March-April spread really tightened [Monday]. It got down to 8 or 9 cents, but then widened right back out to close [Monday] at almost 14 cents.” That being said, Bolling looks to buy that spread (simultaneously buying March and selling April) whenever it tightens to the 10-12 area. “Especially with what is going on with storage, you have to like [owning] the spread,” he said noting that the differential between March and April 2001 blew out to $2.65 when futures made its historic run to $10 back in December 2000.

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