October natural gas futures plumbed new depths in the $2.40s in early Friday trade before taking a significant bounce during the day’s regular session to close at $2.728, up 22 cents from Thursday’s regular session close but 30.5 cents lower than the previous week’s finish.

The prompt-month contract reached a new low for the move at $2.409 early Friday morning, which triggered a round of short-covering during the regular trading session. The contract reached a high of $2.740 just prior to closing.

“All good things must come to an end,” a New York trader told NGI. “Now, whether this is actually the end of the down move or just another pause remains to be seen. Needless to say, the sight of $2.40 gas has a lot of us in the industry reformatting our charts. It is hard to believe that a little more than a year ago we were talking about prices that were more than five times higher than Friday’s low. In July 2008 we had gas priced near $13.70!”

The trader added that strong storage supplies and the lack of weather, storms and demand could leave the downside open, especially with the Henry Hub cash point trading down in the $1.80s. “With the hub at $1.84, the screen on Friday closed at nearly a 90-cent premium. That spread obviously doesn’t need to be rectified immediately, but it will have to work itself out at some point.”

If recent activity in the United states Natural Gas fund (UNG) options ring is any indication, then the October contract may creep lower in the days ahead. Bloomberg.com noted that put volume on UNG was nearly three times greater on Thursday than its rolling four-week average, with October $7 puts being the most active contract. The news service further noted that 94% of those October puts were traded on the ask price, which indicates that buyers were leading the activity.

“If true, that tells me there are still quite a few bears out there,” a New York analyst told NGI. “Buying on the ask means traders are going long the October [UNG put] contract, which means they expect UNG to continue to fall. Had most of the volume been on the bid, it would have been more bullish, since any trader who was willing to have a contract put to them at a lower price would have thought that lower price represented good value. But the fact that most of the activity was on the ask means traders remain bearish.”

At least part of the heavy put activity on UNG likely stems from the fact that UNG continues to trade at a significant premium to its underlying value. UNG closed trading on Thursday at $9.01, 16.6% higher than its $7.73 net asset value per unit. “That has to be contributing to all that put activity, but the fact that so much put volume is trading at the $7 strike price strongly suggests that traders think the October contract will head lower,” the analyst continued. He reasoned that for UNG’s net asset value to fall to $7 per unit, the October contract would have to slip to around $2.30/MMBtu, or roughly 16% lower than Friday’s settle.

Technical traders took a lot from Thursday’s action, which saw a 65 Bcf storage injection report for the week ending Aug. 28 drive the prompt-month contract downward to a $2.508 close, a decline of 20.7 cents from Wednesday’s regular session close. Some market experts noted that Thursday’s decisive close below $2.613 sent a clear message that the trend is still heading down. “Our only intermediate hurdle between here and the $1.964-1.750 area is $2.312,” said Brian LaRose of United Energy. “If $2.312 does hold, we suspect it will only be temporary.”

The Commodity Futures Trading Commission kept its word Friday and released a new and improved Commitments of Traders report aimed at providing more detailed information on the different categories of market participants and their positions (see Daily GPI, Sept. 3; July 8). The new report (see chart) for activity through Sept. 1 revealed that of the commercial trader category’s 129,352 net long positions, swaps traders accounted for an astounding 99% of the total while producers, merchants, processors and users accounted for the remaining 1%. Of the noncommercial category’s 169,846 net short positions, the managed money segment accounted for 82% while “other reportables” made up 18% of the category.

Economy watchers got a less-than-exciting but an important piece of data with the 8:30 a.m. EDT release of employment data by the Labor Department. August nonfarm payrolls were expected to have fallen by 200,000, a hefty improvement from July’s 247,000 lost jobs, but the actual figure came in at minus 216,000. The unemployment rate came in at 9.7%, ahead of expectations for 9.6% and well above July’s 9.4% rate. Financial markets initially were not impressed. September Standard and Poor’s stock index futures shed a bit less than three points once the number was released, and natural gas futures dropped 2 cents. Traders had been saying that only incremental improvement in payroll data was needed to firm confidence for sustainable economic recovery.

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