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Analyst Sees $2.50 Spot Futures In Sight; November Called 4 Cents Lower

November natural gas is set to open 4 cents lower Wednesday morning at $2.73 as heating and cooling requirements for major energy markets can do no better than muster a seasonal response. Overnight oil markets tumbled.

Analysts see something of a delayed market reaction by the December contract. "The natural gas market remained under selling pressure on Tuesday, with the nearby November futures stabilizing to some degree on book squaring ahead of tomorrow's contract expiration, but forward values tending to fall more dramatically in something of a delayed reaction to the weakness at the front of the curve," said Tim Evans of Citi Futures Perspective in closing comments.

"Beyond Thursday's November contract expiration and the need for traders to reassess the prospects for future delivery months in light of the nearby market's sharp drop over the past week, traders will also be interested in the weekly storage data."

Evans calculates a build of 77 Bcf, right in line with historical averages and generally in line with industry estimates. He sees injections continuing well into November and by Nov. 11 the year-on-five-year surplus is expected to have grown again and be up to 230 Bcf. He expects a new storage peak of 4,062 Bcf.

"[W]e think a downside price correction could have further to run, with nearby futures possibly testing the $2.50 level in the weeks ahead. At some point, this more conservative valuation may represent a buying opportunity as there is still plenty of time for the winter to still prove colder than a year ago, even if the cold arrives later than the natural gas bulls had hoped," he said.

Evans is currently short the December futures contract from $3.34 with a protective stop at $3.44.

For the week ended Oct. 29 the National Weather Service forecasts balanced heating requirements. New England is expected to see 139 heating degree days (HDD), or 11 more than normal, and the Mid-Atlantic is forecast to have 124 HDD, also 11 greater than its normal seasonal tally. The greater Midwest from Ohio to Wisconsin is seen with 100 HDD, or 22 fewer than normal.

In overnight Globex trading December crude oil fell 88 cents to $49.08/bbl and December RBOB gasoline fell 3 cents to $1.4585/gal.

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