Natural gas futures continued to press higher Wednesday in what one broker believes can now be called the beginning of a fresh bull move. The October contract on Wednesday closed at $3.860, up 25.1 cents from Tuesday’s finish.

The prompt-month contract made another assault on resistance at the $3.900 level by notching an afternoon high at $3.935, but was repelled for the second time in less than a week (see Daily GPI, Sept. 18).

Analyzing the current market, one broker said it appears that the funds are covering their shorts and now end-users who had been sitting on their hands for winter gas during the long decline in prices are starting to become fidgety.

“In talking to end-users, the universal consensus is that the people who are representing end-users have been sitting around and watching the prices fall over the last few months, thinking they are a genius for advising their clients not to purchase anything forward to lock in winter, even though these end-users normally purchase a little each month on a ladder strategy,” said a Washington, DC-based broker. “These consultants have been right and saved their clients a lot of money, but now we are starting to see prices bounce higher and people are getting nervous.”

The broker said he sees the speculators as the catalyst for the move higher. “The bounce was probably caused by the more nimble players in the market…more namely the funds, who were actively short through all of this and making a ton of money as a result. Whatever their secret sauce is that they trade upon finally told them to be gone, so the funds started covering shorts, which I suspect is pushing some of these vulnerable end-users to act because they are concerned about paying $5 or $6 in the near term for gas next year.”

He said he believes the bulls are rising again. “I think the $2.409 low is a good low for the move and there are signs of a turnaround. I was down in Houston and a couple of these producers said they were done with natural gas and were switching to oil,” the broker told NGI. “That to me is a market sentiment-changing event. When the Texas crowd says it is done with gas and is moving over solely to oil, that’s the change indicator you need. Of course, gas values will go up right after they commit to buying oil rigs and equipment.

“While I think the bottom is in, I do expect a brutal counterattack to this recent aggressive run-up. My bet is it won’t make a new low. We might test $3 again, but I believe it will be a two-wave correction in a new bullish Elliott Wave move. While a new bullish move at this time of year is strange, the seasonal curve has been out of whack the entire year. You have to remember the beginning of a bull market never makes sense at the time it is happening, the same way the end of a bear market never makes sense at the time it is happening.”

Rafferty Technical Research broker Steve Blair said if the market goes into the winter heating season with 3.8-3.9 Tcf in storage, price is going to have a hard time moving higher unless there is early and consistent cold. “At this point the key to this market is the demand picture,” he said. “A pickup in demand is about the only thing that is going to push this market higher in a meaningful way. The move off of $2.500 was predicated off the technicals and the fact that at those depressed price levels [pipeline] companies began to start issuing OFOs. The funds are pretty smart when it comes to this kind of stuff. They are aware of the 17-year-old trendline down at $2.500, so they began to cover their short positions. The CFTC’s [Commodity Futures Trading Commission] Commitments of Traders report Friday revealed that there was definitely some short-covering by the managed money sector.”

Short-term traders see the market as rangebound. “Every time the market gets down to the $3.500 area over the past five or six days, it seems to pop higher at the end of the day. Traders can’t push it much lower than that,” a New York floor trader said Wednesday morning.

“It seemed like traders [Tuesday] were more interested in buying the November [contract], and that pushed the [October-November] spread out to over 90 cents. It didn’t seem like there was much buying on the close.” On Wednesday the October-November spread came in at 89.4 cents.

Looking at the current storage picture, most expectations are that Thursday’s injection report from the Energy Information Administration (EIA) for the week ending Sept. 18 will push working gas inventory levels to more than 3.5 Tcf and very near the previous record level for an injection season of 3,545 Bcf, which was set during the week ending Nov. 2, 2007. Last year’s peak of 3,488 Bcf was reached during the week ending Nov. 14, 2008. The interesting part is that the 2009 injection season still has more than a month left to run.

Ahead of the report, a Reuters survey of 24 industry players produced an injection range of 61 Bcf to 78 Bcf with an average addition expectation of 68 Bcf. Bentek Energy said its flow model is projecting an injection of 67 Bcf, which would bring current stocks to 3,525 Bcf. The research firm expects a 44 Bcf build in the East region, a 15 Bcf build in the Producing Region and an 8 Bcf build in the West Region.

“If regional injection rates follow the five-year average for the remainder of the injection season, stocks in the East Region will be 51 Bcf below the EIA estimated max capacity of 2,178 Bcf,” Bentek said in its weekly storage note. “Stocks in the Producing region will climb to 43 Bcf above EIA estimated max capacity of 1,202 Bcf, and stocks in the West region will be 19 Bcf above EIA max capacity of 509 Bcf.”

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