After probing lower values in early morning Monday trade, the October contract broke the recent cycle by rebounding higher during regular session hours as storm activity in the Atlantic continued to increase. The prompt-month contract ended up testing resistance at $4 with a $3.975 high before closing out the day at $3.938, up 5.5 cents from Friday's finish.

In recent weeks, futures have rallied ahead of a weekend to mitigate price risk in case of hurricane development, then when Monday rolled around and no threat had been identified, traders resumed their probe of the downside. A few changes were made to that script on Monday.

"The natural gas market tested the downside early in Monday's trade, still following the basic pattern of recent weeks -- Thursday weakness after the DOE storage report, some short-covering on Friday ahead of the weekend, and a Monday nod toward resuming the intermediate-term decline in price -- but prices have since turned higher again as a further indication that the market is finding some support," said Tim Evans, an analyst with Citi Futures Perspective in New York. "Hurricane Igor and Tropical Storm Julia may be of no direct concern for the natural gas market, but there is some potential for tropical wave 92L to become a Gulf storm, although it would need to swing to the north of its projected track to take much natural gas production offline."

The analyst added that the lows for the season could already be on the books. "Mostly, we continue to see the market as undervalued relative to the market's reduced storage surplus, with room for a rally to $4.50 or so to correct that, even without more significant storm threats."

Producers and those with risk to lower prices will no doubt be focusing on the Atlantic for the next few days. The parade of storms continued in the tropics over the weekend as Igor strengthened into a Category 4 hurricane in the south-central Atlantic and Tropical Storm Julia formed just southeast of the Cape Verde Islands. Joining the mix was a system of thunderstorms (tropical wave 92L) in the central Caribbean that AccuWeather.com forecasters believe could become Tropical Storm Karl later this week.

"While the system could gel prior to crossing the Yucatan Peninsula at midweek, making it 'Karibbean Karl,' very favorable conditions will be present over the southwest Gulf of Mexico during the second half of the week," said Alex Sosnowski, a meteorologist with AccuWeather.com. "For the second time this season, we may have three named systems spinning away at the same time in the tropical Atlantic."

Tropical Storm Julia is expected to become a hurricane as early as Tuesday as it travels over the open waters of the central Atlantic. Forecasters say what happens with the storm thereafter will be highly dependent on Igor's track.

Igor, which is expected to become the first Category 5 hurricane of the season, is forecast to begin a curve to the northwest over the next 24 to 48 hours, steering the system to the northeast of the Lesser Antilles. However, Sosnowski notes that there is still a chance Igor could slide more to west, missing one or more northward turn-offs, possibly bringing it "too close to the Atlantic Seaboard of the U.S. for comfort and more serious problems."

Top traders saw little significance in Friday's 11.5-cent gain in the October contract. "We did rally on Friday, which seemed to be more of a short-covering rally rather than a fundamental shift," said Mike DeVooght, president of Colorado-based DEVO Capital. "The weekly storage numbers came in close to expectations and failed to be a market mover; the fundamentals of the gas market remain negative; there is more than adequate supplies and demand remains soft."

In DeVooght's view, however, the natural gas market has been down for so long and although the fundamentals have been negative, "we would not be surprised to see some type of oversold, short-covering rally at this time. On a trade basis we will hold our current collars and will use any significant rally as an opportunity to add to our short positions," he said in a morning note to clients.

DeVooght said trading accounts should hold on to a long October $4.50 call purchased earlier at 38-45 cents, and end-users should stand aside. Those with exposure to lower prices should hold on to the remainder of a 12-month collar consisting of the purchase of a $5.50 put offset by the sale of a $7.50 call that was initiated in December.

©Copyright 2010 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.