November natural gas posted a double-digit loss Tuesday as traders cited the relentless increase in production and lack of demand growth as continuing to thwart any price advance. At the end of the day November had fallen 13.5 cents to $3.553 and December had shed 11.5 cents to $3.788. November crude oil rose $1.96 to $88.34/bbl.

“The 12-month strip hasn’t been at $5 since June, but the market went sideways for a long time, between October 2010 and the summer of 2011. The strip is now below $4, and we may be on the last step of this bear market,” said an Oklahoma banker. “You might think that sooner or later people will quit drilling, or fuel-switching will occur and the market will build a base. Natural gas looks cheap compared to everything else, and a lot of end-users have been buying it on a regular basis.

“I believe the market is poised for a bit of a turnaround, but the key is how low do we go first. We are in a bear market, and it just keeps grinding lower.

“If we get below $3, producers will probably start shutting in production. I’d like to think that maybe in 2012 we’ll see this market turn around, but when you have bear markets, calendar 2012, 2013, 2014 just keep trending lower. Producers who just hedge for one year will ride the market out. Calendar 2013 is now $4.60, and calendar 2012 is $4.05, but people think in one-year increments and should have gone out four to five years

“The market is over-saturated, and it looks like it will take some time to turn around. You would think that by 2012 the market would turn around, but a lot of people watch that [EIA] 914 [production] report and that has shown a little lackluster growth recently. I think we’ve got to see some negative growth in production and some demand pull-up before we see this market turn around.

“Weather has been pretty impressive the last two years for cooling and heating demand and that hasn’t helped that much. Think where we would be without it.”

Weather in the near term may just become impressive again. Commodity Weather Group in its 11- to 15-day outlook predicts a vast expanse of below-normal temperatures stretching from Minnesota to Vermont, and from South Texas to Georgia. “While there is disagreement on the pattern by early November, the models are still in good agreement on the second cool push late in the six- to 10[-day forecast] and early in the 11-15 day for the Midwest, South and East,” said Matt Rogers, president of the firm. “Due to cooling normals and the potentially potent event, low temperatures are forecast to dip to the upper 20s to low 30s in the Midwest (days 10-12). The latest Euro ensembles are showing a possible third cool push late in the 11-15 [day period], but the American models show a flatter, warmer flow by then, continuing the model debate. We are favoring the persistent pattern view of the European ensembles.”

The calendar strips may keep grinding lower, but Tim Evans of Citi Futures Perspective is anticipating a bulbous build of 131 Bcf in Thursday’s inventory report that he does not see hindering an eventual price increase.

Under his storage scenario, “the 68 Bcf year-on-five-year storage surplus would expand to 206 Bcf as of Oct. 28, before falling back to 199 Bcf as of Nov. 4. [T]he expanding storage surplus builds will have been fully discounted into the price, with potential for the market to look beyond them to the heating season demand that will follow,” he said. “We continue to see rising heating demand as a force that could lift nearby futures to perhaps the $4.50 area by year-end. In terms of physical demand for natural gas, we note that daily average demand rose from 53.33 Bcf/d in October 2010 to 92.84 Bcf/d in January 2011.”

The storage surplus in the eyes of some is likely to act as a significant deterrent to higher prices.

“We are continuing to view this dynamic of an expansion in the newly acquired supply surplus as an important bearish pricing consideration. And although builds will be slowing appreciably beyond Thursday’s data given the ongoing temperature cooldown, we will still look for strong increases to emanate from current record production levels,” said Jim Ritterbusch of Ritterbusch and Associates in a morning note to clients. “Until the gas-directed rig counts show some reversal from the uptrend that has been intact for almost six months, the production factor will remain deserving of a bearish check mark. Production projections across this year may eventually be adjusted upward to around 7% while next year’s forecast could slowly gravitate toward a year-over-year increase of around 3%.”

©Copyright 2011Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.