After finishing last week on very negative and tenuous footing, natural gas futures extended lower Monday as funds and local traders exerted their influence on a market mostly devoid of commercial players. However, after plumbing a new, four-week low at $3.67 yesterday morning, the November contract struggled back to near unchanged in the afternoon. It settled at $3.74, up 0.1 cents on the day.

With production slow to return after Hurricane Lili last week, physical traders noted a marked decrease in liquidity Monday. That wait-and-see approach was echoed in the futures market Monday, with commercial traders electing to hold off on their hedging and speculative activities until a clearer supply picture is available. The Minerals Management Service Monday said that an estimated 2.57 Bcf/d of gas from the Gulf of Mexico’s Outer Continental Shelf Region was still offline, down from a peak of 9.9 Bcf/d Friday morning.

The lack of participation by commercial accounts Monday gave non-commercial traders the opportunity to push prices around. However, after finding good support down at the $3.67 level, speculative and local traders bid the market right back up in the afternoon. A possible explanation for the market’s choppy trading behavior Monday is that the technical outlook is changing, traders agree.

After etching a textbook island reversal pattern Friday, the November contract settled yesterday below its 40-day moving average for the first time since the middle of August. That, coupled with the fact that non-commercial fund traders have been seen exiting their long positions, is a sign that lower prices may in the offing.

Cynthia Kase of New Mexico-based Kase and Company takes a more scientific approach, but arrives at the same bearish conclusion. “For November, there is immediate support at $3.61 and $3.52, but the primary objective for November is a price of $3.41 that forms both a trend terminus and corrective extension target for this contract,” she wrote in a note to customers over the weekend. Her prediction comes following the market’s failure to close over resistance in the $4.22-25 area after having tested it last week. “If prices do not turn immediately, which we believe is unlikely without a kick from a new hurricane or similar event; then a continuation to much lower levels is expected,” she added.

While the potential for another hurricane is diminished as Autumn wears on, the natural gas market could receive a helpful boost from the nearby crude oil market Tuesday. November crude oil was quiet Monday, but look for that to change when President Bush outlines his case for military action against Iraq in a televised speech Monday evening. If crude rallies, natural gas will have the option to follow in sympathy, traders agree.

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