The natural gas futures market's bearish momentum Thursday spilled over into Friday as the September contract recorded a low of $4.456 before closing the regular session at $4.467, down 13.1 cents from Thursday's close and 45.6 cents lower than the previous week's finish.

Friday's dip below $4.500 was the first for a front-month contract in more than two weeks. The last time it occurred was on July 21 when the August contract recorded a $4.480 low. The week's decline marked a significant shift in the market, according to at least one market watcher.

"The little rally mode we've been in since the middle of July appears to have petered out," said a Washington, DC-based broker. "We were guardedly bullish during that time, but that is now officially gone. Nobody really wants to buy any dip on the weekend, and no one is getting too concerned about storms anymore. Add to that the news that rigs searching for natural gas this week in the United States increased to a 17-month high and the odd that this market could test $5.200 again, much less crest above $5, become a little more remote. More likely, we're going down to test $4.250 or something in that neighborhood."

Record rigs indeed. On Friday Baker Hughes reported that active U.S. natural gas rigs increased by 11 to 983. The last time this level of activity was directed at natural gas was back in February 2009. More importantly, the broker highlighted the jump in gas rigs drilling in U.S. shale. According to Baker Hughes, horizontal rigs increased by 25 to 878, which is a record level. One year ago the horizontal drilling count was less than half of that with 422 rigs active.

In countering the opinion of some market watchers that traders are still wary of the tropics as the peak of the Atlantic hurricane season arrives, the broker said his view of hurricanes is a little bit different nowadays. "I don't think hurricanes are as important to natural gas fundamentals as they were two years ago," he said. "Even a Cat 5 coming through the sensitive areas of the Gulf is not going to decrease the availability of natural gas all that much. As a percentage of where the natural gas is coming from, the Gulf is just not as important anymore.

"Now, if a hurricane swept ashore and flooded pipelines coming out of the Barnett Shale, or triggered massive thunderstorms and mudslides in the Haynesville Shale, then we might have something to talk about. The fact is that onshore has become such a dominant source of supply, a storm's disruption of rigs in the Gulf is not something I would worry about all that much."

Instead, the broker said prices haven't completely imploded yet due to the remaining heat left in the season. "There hasn't been a major breakdown in prices yet because we are still in early August with some really big degree days still coming, so someone isn't going to flush it just yet," he told NGI. "Now, two weeks from now will be a different story."

Analysts studying Thursday's meager 29 Bcf gas storage injection and sharp sell-off see no reason to discount modest injections as a long-term bullish force. "As far as the supply side is concerned, we will continue to note a summer pattern of downsized weekly storage injections that have been largely driven by a strong pull from the EG [electricity generation] sector," said Jim Ritterbusch of Ritterbusch and Associates.

He added that "while the market was nonplussed by Thursday's smaller-than-expected 29 Bcf supply hike and an associated 38 Bcf stretch in the year-over-year supply deficit, we are still viewing the dynamic of reduced storage builds as a latent bullish pricing consideration. Although the bears can continue to cite a sizable surplus against the averages that approximates 220 Bcf, or 8%, these ample stocks have been well digested into the pricing structure."

Analysts following the broader economic picture were not pleased by Friday's 8:30 a.m. EDT Labor Department release of jobs figures. Employment showed stout gains in April and May as the result of hiring temporary Census workers but dropped 125,000 in June. Expectations for July were centered around a loss of 70,000, but the actual figure came in at a disappointing loss of 131,000. The unemployment rate held steady at 9.5% against the 9.6% the market was expecting. September Standard and Poor's Stock Index Futures dropped more than 10 points following the release of the figures.

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