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Futures Rebound Wednesday on Strong Cash Market, Petroleum Futures

Spurred by a rebound across the petroleum futures complex combined with slow to return natural gas production in the Gulf of Mexico, October natural gas futures kept its stay below $11 brief. After settling below $11 on Tuesday for the first time since Hurricane Katrina, prompt month natural gas on Wednesday climbed 40.3 cents to close at $11.166.

After trading higher in the overnight Access session, October natural gas on Wednesday recorded a low of $10.90 and a high of $11.20. Helping to bolster the contract was production news from the Gulf of Mexico. Shut-ins from Hurricane Katrina only reduced to 3.518 Bcf/d Wednesday, down from Tuesday's 3.720 Bcf/d, according to the latest report from the Minerals Management Service (MMS) (see related story).

The petroleum inventory reports released Wednesday morning held a few surprises. According to inventory numbers for last week from the American Petroleum Institute (API) and the Department of Energy (DOE), crude supplies declined by 3.1 million barrels according to the API versus a decline of 6.6 million barrels according to the DOE; unleaded gasoline increased by 5.6 million barrels versus an increase of 1.9 million barrels; and distillates declined by 1.4 million barrels versus a decline of 1.1 million barrels.

On the day, the entire petroleum complex finished significantly higher. October crude settled $1.98 higher at $65.09/bbl, while October gasoline closed 4.57 cents higher at $1.9373/gallon. October heating oil closed at $1.9249/gallon, 8.47 cents above Tuesday's close.

"API/DOE reported an interesting group of figures...not the least of which is a surprising build in unleaded gasoline," said Jay Levine of Advest Inc. "Markets are still trading higher, suggesting the oversold condition is in the process of being corrected and that further gains might be in the cards in the near-term. I've given one client today a 60-40 shot of [Wednesday's] rally continuing through [Thursday] if not heading into the weekend."

Others said natural gas cash market increases Wednesday gave futures a helping hand. "All I heard this morning was that cash prices were creeping up a little bit, so futures had that as support," said Tom Saal of Commercial Brokerage Corp. in Miami. "We got into the gap in the futures market, there wasn't any follow through and then they bid it up, so I guess we are going to be here until we get some direction. The fact that shut-in gas isn't returning very quickly to the Gulf is helping natural gas stay at these lofty levels."

Saal added that the sticking point right now is liquidity, or the lack thereof. "The problem we have in the natural gas futures market right now is the lack of liquidity," he said. "That tells us that we've probably got a pretty big move coming in one way or the other. Even the liquidity in the options market has been problematic. The ask/bid spread has been pretty wide. I would have to recommend for any end-user to buy a percentage here and hope that this is the most you're going to have to pay.

There is a wide range of predictions for Thursday's natural gas storage report for the week ended Sept. 9. Citigroup's Kyle Cooper said his final estimation for the Energy Information Administration report was for a build between 71 and 81 Bcf, even as a Bloomberg survey of 19 analysts was looking for an average injection of 59 Bcf and a median injection of 64 Bcf.

"Indeed our final estimation is vastly different than our initial estimation and as possibly the Labor Day effect was more significant this year," Cooper said. "However, our confidence remains rather low due to the Katrina effect coupled with the Labor Day holiday."

The ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 69.1 Bcf injection. The number revealed Thursday morning will be compared to last year's 96 Bcf injection and the five-year average build of 86 Bcf.

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