Following on the heels of Thursday’s losses, natural gas futuresgapped lower on the open Friday as traders took profits on theirlong positions in sympathy with similar selling in the crude oilpit. October crude finished down 5% on the day at $33.63 per bblwhile October natural gas slipped 2.4% to close at $4.880. OPEC wasscheduled to meet over the weekend in Vienna to discuss possibleproduction increases (check back with https://intelligencepress.comfor breaking news later Monday morning).

Also weighing on natural gas futures prices late last week weremoderating temperatures across much of Texas, Oklahoma andArkansas, which diminished gas demand for electric generation.Slipping more than a dime for weekend delivery, Henry Hub cashprices gave futures traders an added incentive to take profitsFriday, sources agreed.

“Once temperatures dip below 95 degrees, gas demand decreasesexponentially,” said Ed Kennedy of Miami-based Pioneer Futures.”The most inefficient electric generators are the last ones to befired up during hot temperatures and they are also the first onesto be taken out of service when temperatures are moderate.”

And because temperatures moderated so considerably from therecord-setting Labor Day weekend heat last week, Tom Saal, alsowith Pioneer Futures, looks for this week’s storage injection to bein the 60s. “We have a new seller in the [futures] market,” hecontinued. “Storage operators, who have not been very active in thecash market lately, will use this period of lower demand to buy gasfor storage while hedging by selling futures. We’re back to aforward carry market, after being in backwardization since May.Finally, it makes economic sense to put gas in the ground,” hesaid. Backwardization is the term used to describe a futures marketin which successive months in the future have descending value,which discourages storage injections. Because money has a timevalue and also because there is a holding cost associated with mostcommodities, futures markets typically have ascending values forsuccessive delivery months. This is called a forward carry orcontango market. At the close Friday this was true for the rest ofthe 2000 strip as December was at a dime premium to November, whichin turn, was at a dime premium to October.

However, even if a 60-something injection is announced by theAmerican Gas Association Wednesday, it will fall conspicuouslyshort of last year’s 81 Bcf addition and the five-year average of79 Bcf, thus renewing concerns that storage is not keeping pacewith historical levels. Over the past four weeks, those concernshave been no small matter, and the prompt month has reacted byrising an average of 13.6 cents in trading on Wednesdays.

Looking ahead, technicians target trendline support at $4.84 asthe first test to the downside. While that level stemmed Friday’sprice erosion, sources agree it will likely be retested again thisweek. For one Houston-based risk manager, however, the middle toupper $4.60s is the breakpoint for this market. “There are plentyof people that are long at an average cost in the upper $4.80sbasis the prompt month. Right now those positions are just abouteven. However, if this thing keeps falling, they will graduallystop out and I expect that selling to intensify once they are down20 cents or more.”

All Night Trading Kicks Off Without a Hitch

The first all-night Access trading session for natural gasfutures at Nymex went smoothly last week according to sources.Total volume was 3,832 in the overnight session that ran from 4p.m. Thursday afternoon until 9 a.m. (EDT) Friday morning. In fact,the only noteworthy feature was the gap lower open on the dailychart Friday, but traders were quick to attribute that to fallingcash and crude oil prices rather than anything that happenedovernight.

“It is still too early to tell,” said Saal. “You can break it upinto three trading periods: afternoon, night and morning. Of thethree, I expect the morning session, from between say 6 a.m. and 9a.m. to be the most active, when traders will likely use Nymexrather than the over-the-counter market. It will be interesting tosee how much volume increases.”

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