December natural gas swan-dived Monday in moderate trading as traders note weather forecasts have turned less supportive than earlier, production continues to outstrip modest demand and buyers remain unmotivated. At the close December had fallen 12.6 cents to $3.458 and January had retreated 9.6 cents to $3.600. December crude oil dropped 85 cents to $98.14/bbl.

“Natural gas bulls are hard to find these days. But the lack of bulls is really the only thing bullish for the market,” said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm. DeVooght looks for the pervasive pessimism to eventually be self-correcting. “Normally when the market psychology gets this negative, we are usually due for some type of short-covering rally. We look forward to some type of rally. Unfortunately, there is very little positive news on the fundamental front, production is more than adequate and demand is mediocre. Besides the negative fundamentals, the lack of any urgency whatsoever by the buyers is a big reason this market continues to drift lower. We need either that urgency to change, a significant uptick in demand or a decline in production to turn the trend positive. On a trade basis we will hold current positions.”

DeVooght suggests that both trading accounts and end-users should roll down short December $3.90 put options originally sold at 20 cents to $3.65. Producers and physical market longs should continue to hold a strip consisting of December-March $4.75 put options offset by the sale of $7.00 calls for a debit of 16-20 cents.

Directional traders favored the short side of the market by a margin of nearly 5:1, according to government figures. For the five trading days ended Nov. 8 the Commodity Futures Trading Commission reported that managed money increased market exposure to both the long and short sides of the market with the bulk of the activity going into sales of futures and options. In its Commitments of Traders Report funds and managed accounts at the IntercontinentalExchange increased long futures and options (2,500 MMBtu) by 14,171 to 308,905 and short positions contracted by 8,613 to 204,102. At the New York Mercantile Exchange long futures and options contracts (10,000 MMBtu per contract) fell by 893 to 118,781 and short holdings rose by 15,069 to 253,727. When adjusted for contract size long positions at both exchanges rose by 2,649 but short contracts jumped by 12,915.

For the five trading days ended Nov. 8 December futures fell 3.6 cents to $3.745.

At this time of the season traders are trying to get their arms around winter, and it’s a difficult if not impossible call so early without any meaningful heating demand. “We will be watching temperatures carefully moving forward from here. The decline in prices over the last three days came primarily because of the availability of natural gas. Right now, we have just 6 Bcf (0.16%) less than a year ago,” said Peter Beutel, publisher of Daily Oil Hedger.

“The remainder of the season will depend on how cold it is with some interplay allowed for the movement in seasonal stock levels. As long as we distinguish between gas that is going to be used soon and gas that may end up being left in storage for months, the supply side should not become overly difficult. The simple fact is that much of the gas that gets injected in late autumn might not be used until after the winter of 2011-2012. We now have plenty of gas in storage and any movement should be on the build side, but we are getting very close to that time when we will start pulling supplies from storage. Only in 2007 did we pull from storage during this coming week’s equivalent. We would need a genuine cold spell this week in order to start pulling natural gas from storage.”

The problem for the bulls is that any genuine cold spell has yet to enter the weather dialogue. WSI Corp. of Andover, MA, in its six- to 10-day outlook is expecting warmth across a broad swath of the Midwest, East and Southeast. “Above- and much-above-normal temperatures are forecast over most locations south and east of MSP [Minneapolis-St. Paul]. Anomalies as warm as 10-15 degrees above normal are anticipated over the Ohio and Tennessee valleys. Below-normal readings are expected to grip the western third of the country.

“Temperatures may trend cooler over the Upper Midwest, Great Lakes states and northeastern U.S. than currently forecast as a cold front is expected to penetrate the northern tier of the country early next week.”

Said Beutel, “This is a difficult market here, and we need all the help we can get to break it from its very gradual downtrend. The key is just staying long, or getting short on every rally and getting long on every dip.”

Staying long may eventually prove to be the right strategy.

Baker Hughes Friday reported another double-digit decline in the number of rigs drilling for natural gas. For the week ended Nov. 11, rigs targeting gas fell by 30 to 877, and this followed a decline of 27 rigs the week prior. A year ago the number of rigs drilling for gas stood at 955. Total rigs in the U.S. fell by 10 to 2,016 but remained well ahead of year-ago levels of 1,685, and horizontal rigs dropped five to 1,152, still more than the 940 horizontal rigs recorded a year ago.

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