In its first regular session as the prompt month, the September natural gas futures contract on Wednesday broke below $9 but once again failed to record a close under that psychological level. The contract traded between $8.810 and $9.320 during the day before closing at $9.248, up 11.8 cents from Tuesday’s finish.

Even as the hot-cold relationship with crude futures prices continues to be debated, natural gas futures almost certainly received support from their liquid brethren on Wednesday. September crude jumped $4.58 to close at $126.77/bbl.

Forecasting gas prices for the next few months can be tricky business, especially with summer heat and the 2008 Atlantic hurricane season still very much in play, but a few analysts believe they have a good grasp on what the industry will likely see in the third quarter.

“Prices across the energy complex corrected notably over the past month. Among hydrocarbons, the decline has been most surprising and pronounced for the natural gas markets,” wrote analysts Michael Zenker and George Hopley in a Barclays Capital Research note. “Risks to prices from here, in our view, are skewed to the upside. Much of the summer is behind, but the peak in power demand is still ahead, and it is far too early to write off the risks of weather. Natural gas is now near parity with spot coal in $/MWh terms, and we see support from coal at the $8-9 level, below which a substantial amount of demand could come to the market.”

The analysts said they believe the current pullback might have gone a little too far. “We expect prices to rebound slightly and stabilize at $10-12 for the rest of the injection season,” Zenker and Hopley wrote. “We revise our Q3 price forecast to $10.75, down from our previous estimate of $11.75.”

Taking a peek at the gas storage situation, the analysts noted that unconventional plays appear to have saved the day for domestic production. “There is now growing evidence, however, that the dazzling success of unconventional resource development has shifted the tectonic plates of production trends, and, after years of stagnation, domestic supply is up a staggering 4.2 Bcf/d y/y [wear on year] for January through April, according to data compiled by the EIA,” they wrote. “While latest data points are subject to frequent (and sometimes substantial) revisions, the magnitude of the increase leaves little doubt on the overall trend. The strength in production growth, among other factors, has helped inventory levels to recover some of the deficit to last year and allowed end-of-season estimates to creep higher. We now expect October to end with 3.4 Tcf in the ground.”

Looking at the gas storage report Thursday morning for the week ended July 25, the Barclays analysts said they are looking for a 68 Bcf addition. A Reuters survey of 25 industry players produced an injection range of 59 Bcf to 80 Bcf with an average build expectation of 69 Bcf. Golden, CO-based Bentek Energy said its flow model is indicating an injection of 66 BCF, bringing stocks 14.1% below the five-year high and 0.4% below the five-year average. The research and analysis firm envisions a 49 Bcf injection in the East region and 10 Bcf and 7 Bcf injections in the West and Producing regions, respectively.

The ability of natural gas futures to refrain from further declines is good news to technical bulls who would like nothing more than to see the market continue the advance that took it to $13.694 in early July. Students of the natural gas market aren’t so sure.

“For the fourth trading day in a row natgas held above the $8.870-8.800 zone. However, for the fourth day in a row natgas also failed to reverse higher,” Walter Zimmerman of United Energy said prior to Wednesday’s regular trading session. He contends that a market that falls sharply and then is only able to congest in a narrow zone, such as natural gas has done over the past few sessions, is a market in a “bear market rest stop.”

The present market action is not typical of a market ready to advance. “Once natgas bottoms it is typically not shy about reversing higher. Potential near-term downside targets from here include the $8.420 overlap point, then a $7.735-7.695 wave count target zone,” he said.

Analysts looking at the supply outlook see bearish factors coming into play in the form of a sharply narrowed supply deficit relative to last year. Currently working gas inventories stand 347 Bcf lower than at this time last year, but according to an eastern energy consultant, “July 2007 was among the hottest months, but last August and September were well ahead of normal also, and we are not going to match that either. The industry is heading into a period where the storage deficit to last year could collapse.

“The bulls are hanging their hat all on weather, whether it’s a hurricane or above-normal heat that would create a lot of cooling demand. I anticipate more LNG [liquefied natural gas] cargoes because Europe should be near capacity.” The analyst cites production 3.8 Bcf/d greater than last year as more than offsetting a loss of LNG imports, as well as the decline in Canadian gas imports being less than anticipated. According to his figures, April 2008 gas supply was 1.6 Bcf/d greater than last year.

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