In a shortened trading session in observation of the Sept. 11, 2001 terrorist attacks, October natural gas futures were mostly uneventful Friday as they were contained within a slim 18-cent trading range before settling at $11.263, down 8.4 cents on the day but 42.8 cents lower than the previous Friday’s close.

As has been the case most of the week, natural gas production in the Gulf of Mexico made another baby step towards returning to health in the aftermath of Hurricane Katrina. The Minerals Management Service (MMS) reported Friday, nearly two weeks after the storm smashed through the Gulf, that shut-in gas production dropped from 4.02 Bcf/d Thursday to 3.829 Bcf/d Friday, which is a slower rate of return than many had hoped for.

On the good news front was the general consensus that Hurricane Ophelia — after a number of days of uncertainty about its path — didn’t appear as if it would threaten the Gulf of Mexico. The National Hurricane Center said at 5 p.m. EDT on Friday that while models were still in disagreement, its official forecast was for Ophelia to come near the southeast U.S. coast — South Carolina and Georgia — in approximately three days, possibly making landfall.

Commenting on Ophelia, ICAP Energy broker Brad Florer said the market is mainly ignoring the storm. “Everyone I have talked to has said Ophelia isn’t really a factor right now,” he said. “It would have to make one monstrous loop and cut around and drive right through the heart of Florida. I don’t think many people think the odds are in favor of it getting into the Gulf.”

As for the overall natural gas futures market, Florer said trading on Friday seemed pretty slow. “I think the market overall is just paralyzed. Bears are too afraid to make any moves right now. Most people still feel there is the potential for another explosive upside move given the right circumstances.

“That move could occur if we don’t get some production back online quickly or if we were to get another storm,” he said. “In addition, storage could be much lower than we thought, so if we get a cold winter, prices could definitely move higher. There are all of these question marks to the upside that I think basically have the bears handcuffed right now.”

On the flipside, Florer said natural gas futures prices are currently at “unprecedented” price levels and the market is clearly overbought. “Bulls are waiting for additional information before they make another real push here,” he said. “On Friday, I think we really saw the market sit back and take a deep breath ahead of the weekend, looking to reevaluate on Monday.”

The production shut-in situation in the Gulf continues to scare traders as they begin to believe the damages could be more long-term than previously expected. Traders are living and dying by the MMS figures, which dropped fairly quickly from the peak 8.3 Bcf/d shut in initially to about half that as the relatively untouched facilities returned to service. Past that halfway mark, however, “production shut-in figures are still pretty flat from day to day,” Florer said. “If we don’t see that number getting significantly smaller soon, then you are going to see prices go higher in a hurry. There is a lot of strength in the winter trading months compared to the prompt month. I think summer is all of a sudden coming to an end, and in a blink winter is going to be here, posing the interesting problem of storage levels, which people weren’t even thinking about a month ago.”

As an example of the differential between front month and winter pricing, January 2006 natural gas on Friday closed 7.6 cents higher at $12.618, while February 2006 finished 6.8 cents higher at $12.523.

Ron Denhardt, vice president of Strategic Energy & Economic Research, said he believes there is “a substantial amount of demand destruction that people haven’t taken into account.” This also is the shoulder season with little heating or cooling load, allowing time for repairs.

According to Denhardt, the best-case scenario for the industry as it deals with Katrina shut-ins and supplies for the upcoming winter heating season is one in which shut-ins drop to just 1 Bcf/d in October and virtually vanish in November. This would leave total storage at 3,088 Bcf by the beginning of the heating season and at 1,019 Bcf at the end of March, a reasonable level for the end of winter. Denhardt’s “slow” scenario leaves 3.8 Bcf/d off in October and sees storage at just 2,868 Bcf on Oct. 31. The end of winter would see a near-record low level of 765 Bcf under that scenario.

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