For a second consecutive regular session, natural gas futures were bent on testing lower levels in the morning only to be rebuffed in the afternoon. Uncertainty swirling around the potential damage to oil and natural gas infrastructure combined with a stagnant shut-in report helped October natural gas settle 21.6 cents higher Tuesday at $12.656, one day before the contract’s expiration.

The prompt month hit a low of $12.10 in morning trade before steadily climbing for the remainder of the session. October natural gas spiked in the final minutes of the session to a high of $12.70 before closing at $12.656. Taking over as the prompt month Thursday, the November contract finished 1.7 cents lower at $13.120.

The New York Mercantile Exchange Inc. (Nymex) said Tuesday that its prior declaration of force majeure relating to all remaining delivery obligations in the September 2005 Nymex Division natural gas futures contract will continue to remain in effect (see related story). In addition, the exchange has determined to declare force majeure for the October 2005 natural gas contract. Nymex said it was forced to make the moves due to the continuing force majeure declaration by Sabine Pipe Line LLC, the operator of the Henry Hub facility near Erath, LA following on Hurricane Rita.

Pointing out that some talking heads on TV are saying that natural gas could reach $20 by Christmas, IFR Energy Services analyst Tim Evans said it seems that any long-term bull is hailed as a genius, whether or not there is factual and fundamentals support for it.

“While it is possible for a further panic over supply to drive natural gas to almost any extreme level, it appears this is not exactly a rational fear at this point,” Evans said Tuesday evening. “Storage is still above the five-year average, and even in the wake of Hurricanes Katrina and Rita it looks like less than a third of the production lost has translated into a reduction in the surplus. Further hurricanes could extend these production losses through October and November and still have time to recover to near normal levels by the heart of the heating season.

“Long-range forecasts also point to warmer-than-normal temperatures for most of the U.S. west of the Appalachians this winter, which will help both production and storage stretch a bit farther,” he said. “If prices do spike, therefore, we think they’ll have to do so without the benefit of any extraordinary fundamental tightness.”

Evans noted that while prices are in an uptrend currently, they would need to maintain their steep upward rate in order to make it to the $20 mark by the end of the year. “Open interest is rising in support of this trend, but is already 48% higher than a year ago,” he said. “Can we find a further flow of buying to drive prices all the way to $20? The weekly Relative Strength Index is already 77. Can we push that higher for another three months too? We don’t know for sure, but we do think that a break back below $12.20 basis November natural gas would now establish a six-day reversal, putting stress on the uptrend support at $11.422 and the $11.215 low of September 14 to stop the slide. Should that floor fail, a full monthly reversal is confirmed, triggering an even larger cycle of long liquidation.”

Advest Inc.’s Jay Levine said Tuesday that the next couple of weeks could be tough to call. “In the days, weeks and months to come there will be so much information being disseminated — good, bad, ugly (not to mention erroneous) — that it’ll make your head spin,” he said. “How the market spins it will be wide open to interpretation — as usual, but especially now — and one [should] be best prepared for anything and the unexpected.” The broker noted that if word filters out that damage is more or less than expected, don’t expect the market to respond in kind as any reaction could be “simply knee-jerk” and then the market could trade counterintuitively. “I’m not only expecting that, but banking on it.”

Reports of damage from various production and pipeline companies continue to roll in, but traders are taking much of the information with a grain of salt. “For the next day or so, I expect prices to fluctuate between $12 and $13 as traders digest reports of storm damage,” said a New York floor trader. He said traders were getting scattered reports of Rita damage and didn’t know what to believe. “When they hear reports of damage, traders will come in and buy looking for those reports to hold up. I think that a number of companies are just talking their book and the reports are related to their trading positions,” he said.

Just when traders thought it was safe to return to the fundamentals of supply and demand, AccuWeather reported that important tropical weather conditions just won’t go away. They are closely studying a tropical wave along 74 degrees W south of 20 degrees N that is moving west at 10-15 knots. “This general motion will continue for the next few days, and by later Thursday, the wave will be in the northwestern Caribbean, with atmospheric conditions favorable for development as long as a trough expected to be in the area remains far enough to the north, over the Gulf of Mexico.” It added that a key component of hurricane development, warm water, is very much in place in the northwestern Caribbean.

If that wasn’t enough, the forecasting company reported Tuesday morning that additional tropical waves at 28 W south of 15 N, along with 43 W south of 21 N and along 88 W south of 20 N, are all moving westward at 10-15 knots. It added that the wave along 28 W is probably the next wave to keep an eye on. Current computer output suggests this feature might be able to sneak through the south-central Atlantic with minimal shear, then turn northwest before getting close to the Lesser Antilles by this weekend.

The Minerals Management Service (MMS) reported Tuesday that approximately 78% of the daily natural gas production and 100% of the oil production in the Gulf of Mexico remained shut in Tuesday, mirroring the figures issued a day before (see related story). Tuesday’s shut-in gas totaled 7.856 Bcf/d. The average daily Gulf production normally is 10 Bcf/d. Meanwhile, reports from individual pipelines and producers indicated many were still assessing or attempting to assess damage and were not predicting back-in-service dates (see separate report).

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