Natural gas futures bulls saw the red of the matador’s cape Tuesday morning and charged, driving the October contract well past the heights of Monday’s rally. However, almost all of the day’s gains were given back in the last hour of the regular session as the prompt-month contract closed at $3.320, up only 2.3 cents from Monday’s finish.

Futures reached a high of $3.600 two separate times on Tuesday before collapsing back to earth. While the industry has widely accepted the fact that a rally is taking place, no one is quite sure why it is taking place, especially with the bearish fundamental landscape remaining mostly unchanged.

U.S. citizens received two signs Tuesday that the overall economy might be nearing a turn, which could support the bullish case for natural gas. The U.S. Commerce Department said August retail sales figures came in better than expected. Expectations were for a 2% monthly gain, well ahead of July’s minus 0.1% showing, but the actual figure was a stronger 2.7% rise.

The other bit of positive economic news came from Federal Reserve Chairman Ben Bernanke, who said Tuesday “the recession is very likely over at this point.” However, he tempered his comments by noting that the rebound will be “moderate” because of “ongoing headwinds.”

“The natural gas market has extended its recent rally, but it remains something of a rally in search of a reason, with no clear, agreed upon fundamental upward pressure on prices,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “We continue to think the rebound over the past two weeks represents a moment of recognition that the downside potential had been exhausted on the move under $3, leaving prices undervalued, along with some anticipation that by mid-November the addition of heating demand to the equation will result in the usual swing to the storage withdrawal season, removing storage capacity limitations as a market concern until next year.”

Evans added that he is currently seeing short-covering in the October futures as a feature, which is putting “greater upward pressure” at the front end of the curve than on the forward contracts.

Traders were also aware that Tuesday marked the second day of the four-day rollover period of the United States Natural Gas Fund (UNG). The fund is moving long October futures positions to long November ones. Late last week the fund said it might be issuing new shares beginning Sept. 28 (see Daily GPI, Sept. 15).

“So far, I haven’t seen anything in this move that would allow me to definitively say that the UNG roll was behind it,” said a New York trader. “However, it could be playing a part all the same.”

For the moment technical analysts are reluctant to say early September lows in the low $2.40s are the market low. “I hesitate to mark this as a bottom, but the market is flashing warning signals to anyone who is holding bearish positions,” said Brian LaRose, an analyst at United Energy. “I would feel more confident of the market being able to advance further if the market could break the $3.90-4.05 resistance area. There is no reason at present to call this anything other than a bear market correction. There are some sentiment divergences and some Relative Strength Indicator divergences that point to bullish buy signals, and every major market low for the last 10 years has come in September.”

He added that it was difficult to make a long-term call right here. “The economy is not headed in the right direction, but at the same time we have seen fundamentals completely disconnect from the market in just about every other portion of the energy complex: crude inventories versus prices; heating oil inventories and prices are not fundamentally based; and natural gas is the only market that has been following fundamentals. At the same time sentiment readings [in natural gas] are at an all-time low.”

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