Flying in the face of fundamental and technical indicators, November natural gas futures ventured higher Tuesday to close at $7.123, up 31.7 cents on the day. December futures, which will soon take over the front month title, climbed 25 cents to settle at $8.315.

Despite falling around 11 a.m. (EDT) after encountering resistance at the $7.03 high from Monday, the prompt month in afternoon trade was able to break back above the psychological $7 barrier. The rally caught some market-watchers off guard as current temperatures appear to be in line with the season and the natural gas storage situation couldn’t be more healthy.

“The natural gas market is certainly making the most of what we see as a bearish situation, turning the mostly seasonal decline in temperatures this week into a reason to probe the upside,” said Tim Evans of IFR Energy Services. “The timing seems odd, given that heating oil is showing signs of a seasonal top, but the past two sessions have really been the first sign of daylight for those who had been viewing the two markets as a Btu spread trade, so we can’t expect the stalwart believers in this view to abandon their positions now, even though any physical switching between the fuels would have occurred months ago.”

Evans noted that a break of $6.415-6.425 support would confirm a head-and-shoulders top and put the $5.90 low from Sept. 27 at risk. “A retest of the November’s $5.23 low from Sept. 16 would be more in keeping with the more typical result, given the size of the topping pattern,” he said. “We see the $4.52 spot low from September or the 2003 lows at $4.39-4.40 as possible targets, too.”

However, the analyst noted that the November contract might not have enough time to go this low. He pointed out that the December contract is trading at an even higher level, leaving an even greater potential for decline. “On the upside, the stretch past the $7.03 high from Monday puts the market in position to review the $7.23 height that the left shoulder of the pattern attained, if not the $7.44 peak that we’ve labeled as the head,” Evans said prior to Tuesday’s settle. “Regardless of the precise pattern here, a move below $6.415 would leave behind an extensive distribution top.”

Looking at December, GSC Energy’s Craig Coberly said he had been expecting gas to trace out one or more “down-up-down” patterns from the Oct. 7 high. With the first “down” assumed to be complete, Coberly said he took Sunday night’s Access session trade as an indicator that the “up” phase was complete. However, the market said no, and spent Monday and Tuesday continuing to work on the “up” portion.

Coberly advised that December trading below $7.83 will be good evidence that the “down” portion has started. “If this occurs, I’ll look for gas to decline to about $7.32 before completing the ‘down’ portion,” he said.

Turning attention to the almost full natural gas storage situation, most industry followers say the question won’t be whether stocks will be full by the end of November. Instead, the question will be how far past “full” will storage rise (see related story).

Working gas in storage now stands at 3,159 Bcf, according to EIA estimates. The all-time record storage level stands at 3,254 Bcf, which was notched during the week ended Nov. 30, 2001. Stocks are currently 178 Bcf higher than last year at this time and 211 Bcf above the five-year average of 2,948 Bcf.

Citigroup’s Kyle Cooper said his final estimation for this week’s EIA report looks for a build slightly lower than his original estimate. “Our final estimation will look for a build between 54 and 64 Bcf,” Cooper said.

“In spite of this comparative price advantage and the ongoing Hurricane Ivan shut-ins of [1.544 Bcf/d], we’ve seen above average storage injections the past two weeks,” Evans said. “Thursday’s report may make it three in a row, with 60-70 Bcf in refills expected and a 54 Bcf five-year average comparison figure.”

Evans noted that last year at this time natural gas futures prices were falling to $4.40. “This certainly suggests the market is overvalued now,” he added.

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