December natural gas settled modestly higher Tuesday as traders prepared for a double whammy in the form of a government inventory report and options expiration Wednesday. In addition, December futures expire Monday following an extended holiday period. At the end of the day December had added 1.6 cents to $3.415 and January had tacked on 0.3 cent to $3.561. January crude oil added $1.09 to $98.01.

The modest gain notwithstanding, analysts don’t see much justification for higher prices. “I don’t see any fundamental reason for this market to go up, and I do see fundamental reasons for this market to drift lower,” said Steve Blair, market technician with Rafferty Technical Research in New York. “Nothing has changed all that much although there is some technical support at $3.26 to 3.30.”

“I don’t think the market will take a straight shot down, but I don’t see the market going with any kind of rally. If we move directly into winter, we could see a fairly good bounce but we aren’t there yet. The weather in the New York area is seasonal and on Sunday it hit 65 degrees.”

When queried what it would take to sell this market, Blair suggested that “if the market rallies because of some really cold weather, maybe we have to let it run a little bit, maybe into the $3.70 or $3.80 area, but if we just get a short-covering rally or just a little bit of cold, then $3.50 to $3.60 is probably a good place to put on some shorts. If it were just a technical rally, then the $3.50 area would be a reasonable short, but serious cold weather could take the market higher.”

Wednesday’s noon EST release of storage figures could also take the market higher, but estimates are well ahead of last year’s and the five-year average showing a 7 Bcf pull at this time of year. The expected build will chart new territory for volumes held in inventory. Last week’s 19 Bcf increase put storage at 3,850 Bcf, a record.

Houston-based IAF Advisors calculates an 18 Bcf increase as does Ritterbusch and Associates. A Reuters poll of 16 industry observers showed an average 19 Bcf build with a range of 10 Bcf to 28 Bcf. Bentek Energy was expecting a build of 19 Bcf.

Some calculate storage could ultimately reach more than 3,900 Bcf. Tim Evans of Citi Futures Perspective estimates a build of 28 Bcf but also calculates an injection of 23 Bcf for the week ended Nov. 25.

Although near-term weather forecasts are still calling for above-normal temperatures in major energy markets, forecasters suggest that the risk to the forecasts now tilts toward cooler temperatures. In its 11- 15-day outlook WSI Corp. of Andover, MA, says, “Above-normal temperatures are forecast over the northern tier of the country. Anomalies as warm as 10 degrees above normal are anticipated along the U.S.-Canadian border. Below-normal readings are now forecast along the Gulf Coast.

“The risk to the forecast is shifting to the cooler side over locations south and east of Chicago. While they display differences regarding the phase of the NAO [North American Oscillation], all models trended stronger with the positive PNA [Pacific North American] pattern over North America in late November and early December.”

Technical buying seems to be giving the market a short-term lift in the eyes of some. Although December managed a healthy gain Monday, bears got some encouragement with the $3.285 low posted early in the session. “The early selling, it seems, had unlocked enough buying to push the market back into positive territory by the end of [Monday’s] session. Most of the buying that was seen yesterday morning was technical and was triggered by the movement to oversold levels,” said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm.

He noted that prices have been draped over the lower Bollinger bands for several sessions and said “natural gas prices are still desperately oversold on both daily and weekly charts, and they can easily rally, but we seem to have gotten more [oversold pricing] from the oversold pressures recently than we did in previous weeks.”

From a fundamental standpoint, Beutel sees growing storage surpluses relative to historical averages as the heating season progresses. “Last week’s EIA [Energy Information Administration] underground storage [report] showed a build of 19 Bcf. That gave us six of the last seven years with builds last week. Stocks ended 14 Bcf higher than a year ago, against a deficit of 6 Bcf (-0.16%) a week earlier. Against the five-year average, they are now 224 Bcf higher (6.17%), compared to 238 Bcf higher (6.62%) a week ago. These surpluses seem likely to grow as we move more deeply into this heating season,” he said in a Tuesday morning note to clients.

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