Expectations of a warm-up early next week, combined with some moving and shaking by one of the major natural gas funds, helped November natural gas futures on Wednesday to continue testing downside support. The prompt-month contract recorded a low of $4.399 before closing the regular session at $4.436, down 15.2 cents from Tuesday.

Combined, the November contract has dropped 44.4 cents over the last two regular sessions. Of interest is the fact that the front-month contract is coming ever closer to filling the gap left by the October-to-November roll two weeks ago. The current gap runs from $4.035 to $4.351.

Citi Futures perspective analyst Tim Evans noted that the natural gas futures market showed early interest Wednesday in following the petroleum markets higher but ended up coming under “renewed selling” pressure after the bounce proved limited. “The two- to five-day temperature outlook remains supportive, but the market is now looking beyond the current pattern to next week when more routine seasonal temperatures are expected,” he said. “As we’ve been highlighting, this warming trend has the potential to shift attention back to all-time record high storage and possible renewed weakness in the cash market that could lead the futures market lower, particularly on November futures as they approach their Oct. 28 expiration.”

Tuesday the long-only U.S. Natural Gas Fund (UNG) said it may consider purchases other than futures to comply with proposed government position limits (see related story). Longer term the move may be beneficial to futures trading, but in Tuesday’s trading at least it helped pull the plug and prompt a stout 29.2-cent decline in the November contract.

“Traders saw in this the possibility of a market with fewer investors on the long side, and that combined with overbought pressures to bring in selling,” said Peter Beutel of Cameron Hanover, a Connecticut-based energy consulting firm. He added that if UNG were to use equities as its primary investment tool, “it would be a blessing for the industry and consumers. By adding capital to equities, it would provide drillers and producers with fresh avenues to raise funds for future output. Of course, if the fund moves to futures-like derivatives, then it will make little difference overall.”

UNG began its roll of long November contracts to long December contracts on Wednesday. The roll is scheduled to end Monday.

The National Weather Service in its six- to 10-day forecast calls for somewhat more moderate conditions. Earlier forecasts enveloped the eastern half of the country in below-normal temperatures, but its most recent predictions limit below-normal temperatures to the middle of the country. The Northeast and desert Southwest are expected to be above normal and the remainder of the country is expected to have normal temperatures.

A Washington, DC-based broker addressed the phenomenon of the past few weeks where prices were rising despite storage levels reaching a new all-time high.

“Sure, the onset of colder weather has helped reduce the possibility of the train wreck scenario of exceeding storage capacity, but the views have not changed in terms of the market being oversupplied with gas,” he told NGI. “Despite that realization, prices have moved up $2 over the past few weeks. I think this is a result of people needing gas, so they lock in and end up pushing the price higher. The producers are normally the counterweight to that. They have been more actively hedging than normal and are likely mostly done for the rest of this year. Now that the producers have pulled back, the counterweight is not there to the end-user/buyer coming in.”

Turning attention to Thursday morning’s natural gas storage report for the week ending Oct. 9, most industry estimates expect the Energy Information Administration (EIA) to report a build much smaller than both last year’s 81 Bcf addition and the five-year average injection of 64 Bcf.

Evans’ early prediction is for a 50 Bcf build, which also happens to be the number that Bentek Energy is expecting. A 50 Bcf injection would bring current stocks to yet another record high of 3,708 Bcf.

“If injections follow the level of the five-year average for the remainder of the injection season, then inventories will end the season at 3,880 Bcf,” according to Bentek. “An injection of 10 Bcf in the West brings inventory levels to within 2 Bcf of EIA estimated peak working gas capacity, but 187 Bcf below EIA’s design capacity of 694 Bcf. An injection of 14 Bcf in the Producing Region will result in inventory levels at 98% of EIA peak capacity and 89% of design capacity.”

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