Following the September contract's 11.3% decline in values last week, the October contract, in its first regular session action as the front month, rebounded on Monday to close at $3.812, up 10.7 cents or 3% from Friday's close.

Despite the bounce, some market watchers are taking the wait and see approach before proclaiming whether the lows are in. Citi Futures Perspective analyst Tim Evans said Monday that natural gas futures were "reconsidering Friday's swing" by testing the upside after the September contract went off the board on Friday near its lows.

"There seems to be plenty of tropical storm or hurricane action in the Atlantic now, but no current systems in the Caribbean or Gulf of Mexico that would provide more urgent support for natural gas prices," he said. "The temperature outlook continues to promise some warmer-than-normal temperatures that will help sustain seasonal air conditioning demand on into mid-September, although we would say this is also not necessarily compelling, since the market has certainly ignored more intense heat in July and August."

Fundamentals aside, Evans said the market's next move is predicated on whether or not the recent bout of selling has run its course. "The real issue for natural gas, in our view, is simply whether prices have exhausted the prior flow of selling and have reached a price level where it represents a true bargain," he said. "We think it's possible, but need more evidence in order to confirm."

One New York trader added that it would take "more than a dime rally" to change his market view. "Since the year's high of $6.108 back in early January, front-month values have fallen $2.296, or approximately 38% through Monday's close," he said. "This is why it is going to take more than a 10-cent rally to get me overly excited that a change is under way."

Ultimately, natural gas volumes and prices are likely to reflect growth, or lack thereof, in the broader economy as a whole, and Friday's release of second quarter gross domestic product (GDP) figures by the Federal Reserve gave only mild encouragement to economic bulls. Expectations were that the economy grew in the second quarter at an annual rate of 1.3%, but the actual figure came in at 1.6%. The August estimate follows data from a month earlier that showed Q2 growth at 2.4%. On an annualized basis GDP is 3% higher than a year earlier.

With prices breaking below $4 it puts funds and managed accounts and those concerned with purely directional moves in natural gas prices in something of a quandary. Should they continue to press the short side of the market with further selling, or perhaps diminish their exposure to potential market advances that might result from unforeseen weather developments and the likely emergence of a seasonal price advance?

For the five trading days ended Aug. 24, traders answered that question with a hefty increase in selling. The Commitments of Traders report showed that at IntercontinentalExchange long natural gas futures and options (2,500 MMBtu) fell by 4,167 contracts to 255,953 and short holdings rose by 32,544 to 99,018. At the New York Mercantile Exchange long natural gas futures and options fell by 1,109 contracts (10,000 MMBtu) to 141,426 and short contracts gained by 6,622 to 214,611. When adjusted for contract size, longs at both exchanges fell 2,150, but short futures and options rose by 14,760. For the five trading days ended Aug. 24, October futures fell 22.4 cents to $4.059.

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