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Traders see natural gas at $2 in the new year

Following a relatively balmy Christmas holiday, natural gas prices sank to the lowest level in in two years. Natgas futures on the New York Mercantile exchange closed at just over $3 per British thermal unit Friday, down nearly 13 percent for the holiday-shortened week.

"It has so much to do with weather, so much to do with supply," said Peter Amandio, Chicago Energies president, who trades nautral gas futures at the Nymex. "It looks as though there's going to be a lot of pressure on the market."

The mild start to this winter has seen lower heating demand, leaving natural stockpiles at higher levels than this time last year, and prices down more than 50 percent from a peak of $6.40 per Btu when the so-called polar vortex resulted in a prolonged cold snap for much of the country.

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Natural gas sits in storage tanks in Erath, Louisiana.
Derick E. Hingle | Bloomberg | Getty Images
Natural gas sits in storage tanks in Erath, Louisiana.

Right now, analysts and traders say both the weather and the demand outlook are pointing toward a further challenge of 2012 price levels, well below $3.

"When you look at those charts you see a big open space to the downside," Amandio said. "For it to get to $2 right now I don't think would be that big a deal."

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Schork Group President Stephen Schork wouldn't be surprised to see futures fall below $2, if it proves to be a mild winter.

"Last winter was an anomaly, because it got cold early and it stayed cold all the way up until April, " he said, sending inventory levels to the lowest level in more than a decade. But after a mild summer and fall, stockpiles have been replenished, with a steady increase in production in 2014.

With no repeat of the polar vortex, Schork said, the government's weekly inventory reports are likely to become increasingly bearish for natural gas prices.

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"The year-on-year surpluses in supply are going to continue to grow, week in and week out," he said.

But with so many investors increasing their bets that futures will continue to move lower, a snap-back in prices could move higher quite sharply.

"If we have any sort of weather, you could see a quick pop," said Amandio.