December natural gas slipped lower in light trading Friday as traders continue to see little threat of higher prices in the near term but also see a dearth of sellers at present prices. At the close January had fallen 6.4 cents to $3.584 and February had retreated 6.2 cents to $3.613. January crude oil added 76 cents to $100.96/bbl.

“Don’t you think that at $3.58 people [drillers] would start saying, ‘I’m not going to look at this market.’ This market just has to have more economic value. You would think that the future is natural gas. It’s plentiful and cheap,” said a California risk manager.

From a hedging perspective, the risk manager said, “Some of my clients bought some outright calls for next year. The options have gotten so cheap, they just buy the calls for the months they need and go from there. The only interest in puts is if prices get down, they sell them a little bit and say, ‘If I can sell $3.50 puts and collect 15 cents, I’ll put that in my pocket.’ The utilities out here are making money hand over fist, and they have a large margin to work with.”

In the eyes of the risk manager, natural gas trading has a hard time measuring up to oil trading. “You look at natural gas, the market is down 6 cents on a tight range of about 10 cents. January natural gas has about 273,000 contracts [of] open interest and it traded 81,000 contracts. Nymex crude has 293,000 open interest but traded 221,000 contracts. That tells me that natural gas as a trading barometer is not on the same stage as crude oil. When you get a market that is depressed, the players that want to trade go somewhere else.”

The manager added that he thought if natural gas prices were to rally above $4.50, it would likely get the attention of his end-user clients; “There might be a winter that could push prices to $5; $4.50 would get out some shorts. But the charts show that natural gas is a pent-up commodity and no one wants to believe in it. It’s pent up to the point that who is going to sell any more? Those that do would rightly have their rear ends kicked; $4.50 to $5 would do some real damage to end-users if you had some kind of winter to go along with it.”

Others see market risk to the downside. “The numbers are all indicating that [natural gas] is through the roof but supply is even greater. The supplies are just overwhelming,” said a Washington, DC-based broker.

“The forward curve is very flat, so it’s hard to get optimistic about this market. The risk is probably greater to the downside. I don’t know what is going to get this market going, but I don’t see a lot of range on this market. On the downside is the cost of exploration, but on the upside the market seems bound by the high levels of inventory and available supplies. We are talking about exporting, for Pete’s sake.

“I see the market bound between $3 and $4 to $4.50.”

The broker did point to a string of positive economic reports as implying eventual improvement in the broader economic landscape and at some point burrowing into the natural gas market.

Friday’s employment report was definitely a plus. The Labor Department reported that the unemployment rate for November had fallen sharply to 8.6% from October’s 9.0% and expectations for November of 9.0% as well. Non-farm payrolls grew by 120,000, somewhat shy of anticipated growth of 131,000, but October’s 80,000 figure was revised upward to 100,000.

Other analysts see the market’s near-term direction as a function of weather forecasts. “The market will now shift focus back to demand side drivers that will mainly zero in on one to two-week temperature expectations. Although these temperature views have been shifting almost daily, they haven’t strayed much from a neutral appearance,” said Jim Ritterbusch of Ritterbusch and Associates. “With storage currently at a record level of some 3.85 Tcf and about 7.5% above five-year averages, normal temperatures are likely to keep the market within a comparatively narrow trading range of about 40 cents, in our opinion.

“Although the production factor is beginning to provide evidence of response to the low pricing environment, this type of development tends to be grindingly slow and will require several more weeks of declines in gas-directed rig counts in order to pack much punch. However, a downtrend in the gas rigs, even at a gradual pace, could help to place a bottom into this market unless the winter proves to be exceptionally mild.”

Bulls just can’t seem to get a break as extended forecasts call for above-normal temperatures to dominate key eastern and Midwest sections of the country. WSI Corp. of Andover, MA, in its 11- 15-day outlook shows above- to much-above-normal temperatures north and east of a line extending from Oregon to Mississippi. “Above-normal temperatures are forecast over the northern tier of the country; below-normal readings are anticipated over the south-central U.S. and most of the western U.S. Anomalies are expected to average between 3-7 degrees above or below normal.”

The forecaster said the Friday morning forecast represented no significant changes from Thursday and risks to the forecast included temperatures trending “colder in the West and warmer over the southeastern U.S. than currently forecast. The European ensemble model continues to advertise the PNA [Pacific North American pattern] will transition to a negative phase in mid-December. The AO [Arctic Oscillation] and NAO [North Atlantic Oscillation] are forecast to remain in positive phases.”

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