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Downside Risk Looming; November Called 3 Cents Lower

November natural gas is set to open 3 cents lower Tuesday morning as traders see a market overextended to the upside given current fundamental factors. Overnight oil markets retreated.

Forecasters are calling for cooler temperatures, but in the big picture heating load and cooling load are below seasonal norms.

"[Tuesday's] forecast is cooler than yesterday's forecast across a good portion of the eastern and central U.S., as well as the northern Rockies. California and the southwest U.S. are warmer," said WSI Corp. in its Tuesday morning report. "PWCDDs are only down 0.1 for days 11-14 and are now forecast to be 7.5 for the period. GWHDDs are up 1.9 to 41.9, which are almost 14 below average.

"Forecast confidence is average as all models suggest a breakdown with the Pacific pattern and a moderating trend, but there is always inherent uncertainty with the details during periods of transition. There is some upside potential across SoCal early in the period, but a drop in the PNA [Pacific North American system] offers some minor upside over the Midcontinent as the period progresses."

Analysts are scratching their heads at the six-day run of November futures in light of unsupportive weather factors. "The upside price acceleration of the past week has surprised given the fact that the weather factor has offered negligible impetus toward higher prices," said Jim Ritterbusch of Ritterbusch and Associates. "Updates to the short-term temperature views are favoring above-normal temperature trends during the next couple of weeks that will keep both HDDs and CDDs appreciably reduced as this shoulder period proceeds. And given a lack of storm threat at this advanced stage of the hurricane season, we feel that the market should be erasing storm premium.

"Nonetheless, the fact that the longstanding supply surplus against five-year averages has been cut to only around 200 Bcf appears to have triggered the attention of the bulls in allowing the market to prioritize technical rather than fundamental factors, which it is often able to do across a very short-term time frame. Nonetheless, we see this price rally as extended with downside price risk now far exceeding that to the upside, in our opinion."

In overnight Globex trading November crude oil fell 41 cents to $50.94/bbl and November RBOB gasoline dropped a penny to $1.4868/gal.

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