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Weather Bulls, Supply Bears Set to Square Off; December Called Flat

December natural gas is set to open unchanged Monday morning at $2.96 as weather forecasts hint at cooling to come, but show no immediately pervasive trends beyond the current warm-dominated patterns. Overnight oil markets inched higher.

Analysts see a classic duel between supply and demand setting up for the winter. "The mercury is set to drop soon, but few people (if anybody) sees a problem this winter in terms of supply in the U.S. market," said Scott Shelton of ICAP Commodities in a morning note to clients. "It will be cooler this winter, closer to normal really, but nonetheless, the experts say that demand will indeed impress. Storage won't break any records, but it will be close. If the next five weeks look anything like this week, we've got a real horse race."

Friday's dump by the November contract was a blow to the bullish case, but longer term trends in drilling may eventually augur well for the natural gas market as supply ultimately declines.

Baker Hughes Inc. reported Friday that the U.S. rig count continued its slide for the week ended Friday, dropping four units overall in what proved a down week for natural gas-directed drilling. The United States fell to 909 rigs, continuing a pattern of retrenchment that began this summer. One oil-directed unit returned to the patch, while five gas-directed rigs packed up shop. The U.S. drilling declines included six directional rigs and two horizontal, while four vertical units were added for the week, according to BHI.

Technical analysts see the sharp decline Friday as perhaps eventually setting up a winter rally.

"There were a lot of people long, insisting we would get a pre-season rally anyway," said Walter Zimmermann of United ICAP in a webcast Friday. "I suspect that length is getting flushed out this week. The implication is that there will be a re-test of the $2.52 low if not a test of the $2.12 area. The only intervening support is where we ended up Friday down off the high of $3.43.

"The only support between here and $2.52, is $2.65, but the irony of all this is that the further natural gas sells off, the better the case for some form of winter rally."  

In overnight Globex trading December crude oil rose 10 cents to $54.00/bbl and December RBOB gasoline gained fractionally to $1.7224/gal.

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