Caught between forecasts calling for another blast of cold air and its seasonal inclination to move lower, natural gas futures shuffled sideways Friday as neither bull nor bear could get much of anything going. The market finished mixed, with gains in the front months contrasting with losses in the back of the strip. The new prompt contract March finished at $5.605, up 2.2 cents for the day and 14 cents higher for the week. Weighed down by losses in the winter 2003/04 contracts, the 12-month strip advanced only 1.1 cents to $5.016. At just 66,757, estimated volume was light and reflected the market’s lack of direction.

According to the latest six- to 10-day forecast released Friday by the National Weather Service, below normal temperatures are expected to sweep back across much of the nation for the Feb. 6-10 time frame. Only the Pacific Northwest and the Southeast are expected to see normal temperature readings.

However, even with those chilly temperatures in the forecast, the market may have a difficult time putting together the buying needed for another advance. Traders note that by notching a $5.74 high in trading on Thursday, the March contract fell short of its all-time high of $5.75 from Jan. 23. Should the next rally fall short of those levels, it would constitute a series of lower highs — an undeniably bearish scenario.

Traders are also quick to point out that prices typically fall in the first quarter of each year. Few know this better that Thomas Riley of West Virginia-based Petroleum Development Corp., who notes that the winter peak in natural gas has never come later than Jan. 31. The best analogy for this year, he continues, is the winter of 1995-96, when below normal temperatures depleted storage reserves to less than 50% of capacity, or roughly 1,500 Bcf, by the end of January. “Although we were at a whole lot lower level then, the market was flat for the month of January before trending lower in February,” he said.

It is for this reason that PDC has used low costs option collars to lock in a portion of its summer production at relatively high gas prices. Specifically, Riley has used the sales of in-the-money call options to finance the purchases of exactly twice as many put options. “[This strategy] only caps one-third of your upside while protecting two-thirds of your downside risk,” he explains.

Looking ahead, the battle lines are already drawn for this Thursday’s storage report. Following the news that a whopping 247 Bcf was pulled form storage during the week ending Jan. 24, market-watchers have sharply contrasting views as to what we will see this week. Citing heating degree days estimated at 182 versus 152 last year and 218 normally, Thomas Driscoll of New York-based Lehman Brothers expects a 130 Bcf withdrawal. If realized, a number of that magnitude would compare constructively against last year’s 78 Bcf draw as well as the five-year average calculated at 111 Bcf.

Meanwhile, Kyle Cooper of Salomon Smith Barney in Houston is even more bullish on storage and prices and sees thinks a 200 Bcf takeaway could limit the market’s downside potential, at least in the short-run. In the long-run, he is concerned about the large speculative long buildup in the market. According to the Commodity Futures Trading Commission, non-commercial traders held a net long position of 19,793. Should the market continue lower, those longs could flood into the market as sales and propel prices even lower.

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.