November natural gas staged a furious end-of-week rally Friday as traders factored in cooler weather and holders of short positions may have figured that the outlook couldn’t get much better and decided to cover. November jumped 17.2 cents to $3.703 and December rose 14.6 cents to $3.960. November crude oil surged $2.57 to $86.42/bbl.

“We were just watching the market and wondering why,” said a New York floor trader. “There is no reason for this market to trade 20 cents higher. Volume was strong, 170,000 contracts in just the November [contract].

“We were looking for a settlement of $3.70 and it just made it above at $3.703, so that is a positive sign. We may see a continuation of this Monday. I can’t tell you why, but we just closed on a good note. I was expecting prices to ease toward the end of the day with guys taking profits on their long positions, but there wasn’t that much of that. Prices settled only 4 cents off their high.

“Across the board, energy contracts were higher, and could we have been up on the strength of those? Maybe; 20 cents is a big advance what with [Thursday’s Energy Information Administration] report and what’s coming out of the ground.”

If drillers’ intentions are an indication of future production, it is likely still more gas and oil will be coming out of the ground. Oilfield services firm Baker Hughes reported that as of Oct.14 the number of rigs drilling for gas increased by one to 936, just 30 rigs shy of a year ago. The number of horizontal rigs increased by five to 1,153, much greater than the 926 in operation a year ago, and total rigs in the U.S. grew by 11 to 2,023, more than the 1,670 drilling a year ago.

Others see internal market machinations at work in Friday’s rise rather than any fundamental change in the supply-demand landscape.

“This market put on a strong showing today [Friday] on what appeared to be fund short-covering, pre-weekend profit-taking, cooler temperature expectations, etc. [The] stronger trade was also supported by spillover from [Thursday’s] ability to shrug off of a seemingly bearish storage report,” said Jim Ritterbusch of Ritterbusch and Associates. “However, we feel that the market will still need to contend with another triple-digit injection [report] next Thursday, and as a result, some significant selling could develop by the middle of [this] week. Additionally, a record pace of production continues to loom as a major obstacle to sustainable price gains…All in all, we are still viewing nearby futures as a near-term trading affair between the $3.45 and 3.75 parameters and will suggest trading the market accordingly.”

Thursday’s larger-than-expected storage injection report of 112 Bcf has prompted some to revise their storage estimates for the remainder of the season.

Total storage stands at 3,521 Bcf and “is now 56 Bcf less than a year ago but 68 Bcf above the five-year average for the date. It’s probably also worth bearing in mind that the five-year average itself has trended higher in recent years, and so inventories may be more of an overhang than the year-on-five-year comparison would suggest,” said Tim Evans, analyst with Citi Futures Perspective in New York.

Evans said the combination of expected degree day accumulations plus the larger-than-expected build of 112 Bcf has caused him to reevaluate his storage estimates for the balance of the injection season. His estimate of 125 Bcf for the week ended Oct. 14 was raised to 131 Bcf. Oct. 21 was increased by 13 Bcf to 95 Bcf, and Oct. 28 was increased by 10 Bcf to 62 Bcf.

“One way or another, we think it will take more weather in order to turn the fundamentals around to an extent that will support a sustained price rally. In the near term, that could be a late-season tropical storm that swirls though the Gulf of Mexico shutting in oil and gas production. Or it could be a cycle of colder-than-normal temperatures,” Evans said.

“But the one more reliable support will be the simple change of seasons. Whatever else comes along, we know that temperatures in North America will be dropping over the next three months and heating demand will be surging. Last year, for example, U.S. total natural gas demand grew from 53.3 Bcf/d in October to 92.8 Bcf/d in January, a 74% increase.”

For portions of the country, cooler weather may arrive sooner rather than later. WSI Corp. of Andover, MA, in its six- to 10-day outlook predicts cooler-than-normal temperatures south and east of a broad arc extending from Pennsylvania to Illinois to West Texas. “Above-normal temperatures are forecast over the southwestern U.S. Below-normal readings are anticipated over the south-central and southeastern U.S. Anomalies are expected to average between 3 to 8 degrees above or below normal,” the forecaster said.

This forecast is cooler than Thursday’s and WSI cautioned that “temperatures may trend warmer in the West and cooler over most of the eastern U.S. than currently forecast. All models shift the focus of the ridging and warm weather into the West next week and suggest a deepening eastern trough will bring more fall-like temperatures to most of the eastern U.S.”

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