Despite the fact that natural gas production from the Gulf of Mexico is still only a little more than 80% of normal following Hurricane Ivan’s wrath more than a week ago, October natural gas futures continued lower on Friday in a big way. The prompt month dropped 17.2 cents to close at $5.392.

While Thursday’s 6.5-cent drop halted the four-day uptrend, trading action on Friday went looking for support from the get-go, notching a low on the day of $5.33 at 10:46 a.m. (EDT).

Traders were uninterested in Hurricane Jeanne as the storm opted to spare Gulf production in favor of a collision course with Florida’s east coast. However, the second incarnation of Ivan on Friday was still able to knock off additional Gulf supplies. The Minerals Management Service (MMS) said Friday afternoon it has received one report regarding Tropical Storm Ivan. The agency said six platforms in the Lake Charles District have been evacuated with a combined shut-in production of 257 b/d of oil and 49 MMcf/d of natural gas.

“As was the case on Thursday, the natural gas futures markets are continuing to test the downside, but still seem to lack full confidence in the recovery in supplies from the Gulf of Mexico,” said Tim Evans of IFR Energy Services. He noted that the 2.33 Bcf/d of production still shut in from Hurricane Ivan is just about the volume by which storage injections have been exceeding the five-year average rate over the past course of the summer.

“In other words, the market really is in something of a close physical balance here,” he said. “Having said that, we still think this leaves considerable downside potential for prices, as inventories are still 223 Bcf or 8.2% higher than a year ago, when nearby prices tested $4.40 during October. This suggests a dollar of downside risk on the October futures, but even more for November and December.”

The MMS said there are still 31 platforms and one rig evacuated in the Gulf. The cumulative shut-in amount of natural gas production from Ivan stands at 43.3 Bcf, which is equivalent to 0.973% of the yearly 4.45 Tcf the Gulf produces.

With October heading into expiration, much of the market focus turned towards the November contract, which closed on Friday at $6.067, down 15.2 cents from Thursday.

“November futures slipped below the $6.08-6.09 lows of the past two sessions, but have yet to draw the kind of follow-through selling we thought might overrun the failed resistance at $5.92 to probe intermediate-term support in the $5.75-5.80 zone,” Evans said. “If the market were to fail to collect itself in that mid-range area, we see a full retracement to the $5.23 low from Sept. 16 as the most likely alternative.”

He added that lower levels are possible over the longer term, with an eventual break of $5.23 likely to drive November toward the $4.52 spot low from September or the $4.39-4.40 lows of September-October 2003 as the longer-term benchmark.

“The market may only be testing the downside so far, but it is a test with potential to evolve into a much more dramatic drop,” Evans said.

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