While funds appear to be exiting some of their short positions, November natural gas futures on Monday recorded their fourth consecutive drop in values. The prompt-month contract reached a low of $4.467 just after noon EDT before closing out the regular session at $4.513, down 27.4 cents from Friday’s finish.

Since closing at $5.161 last Tuesday, the November contract has dropped 64.8 cents, losing nearly 13% of its value. The drop in prices coincides with moderating temperatures in a number of high gas usage regions, which had been shivering under below-normal temperatures as recently as a week earlier.

Traders on Monday were also forced to make heads or tails of Friday’s Commitments of Traders (COT) report from the Commodity Futures Trading Commission. According to the report, which showed activity for the seven days ending Oct. 20, funds and managed accounts reduced their holdings of short positions. As of Oct. 20 the “managed money” component of the COT report showed that long holdings were reduced by 8,039 contracts to 129,318, and short positions were trimmed even further by 13,038 to 161,574. November futures rose 19.9 cents for the seven days ended Oct. 20, which may at first glance appear positive. According to some traders, however, a rise in prices accompanied by reduced short interest is not indicative of any trader perception of a bullish outlook. Shorts are just exiting the market, one New York broker told NGI.

Analysts note that on Friday Baker Hughes reported that the number of rigs looking for natural gas increased by four to 725. This is still a long way from the 1,529 rigs that were turning to the right a year ago, and market bulls continue to bide their time until reduced production presumably collides with higher demand and prices rise.

“The timing of that is open to debate right now, but once it begins, it will take nearly a year to catch up, especially if the period of lower output coincides with a period of increasing economic activity and higher energy consumption,” said an East Coast energy consultant.

He added that the timing of that event is difficult to predict, but for this week “the more immediate concern is the weather. It has been colder and wetter than normal in the Midwest and Northeast this month, and Friday’s forecasts are calling for a continuation of the trend — which is likely to continue into and during the heating season,” the consultant said.

Despite record levels of natural gas in storage, Stephen Smith of Stephen Smith Energy Associates believes the pressure on the market as storage nears capacity levels will likely be released by a good stretch of cold weather. Smith said the average Henry Hub cash price increased by 77 cents/MMBtu last week likely due to the early heating degree day estimates for the week ending Nov. 6, which are expected to be 31% greater than normal. “This very cold early November would effectively get the gas market past the point of maximum storage crunch pressure,” he said.

The analyst said he believes prices have seen the bottom. “The 2009 bottom for average weekly Henry Hub cash prices was most likely set at $2.19/MMBtu for the week ending Sept.-04,” he said. “Since that price bottom several factors have combined to significantly reduce expectations for the scale of the October/November storage build. This explains why recent gas prices have moved so clearly into a ‘post-storage-crunch’ uptrend.”

Due to some expected colder than normal temperatures, Smith hypothesizes that there will likely be 86 Bcf of “above-normal” demand in the four-week period ending Nov. 6.

Looking out through January, Smith said his “base case” price outlook, which assumes an environment of $65-80 WTI [West Texas Intermediate crude oil], private weather degree-day projections through Nov. 6 and 30-year Stephen Smith Energy Associates weighted averages for cooling degree days and heating degree days through January, produces a peak of 3,800 Bcf in storage as of Oct. 30. That number would likely fall to 3,066 Bcf on Jan. 1, which would represent a surplus of 778 Bcf versus 10-year norms, but only 217 Bcf more than last year’s surplus at the same time, he said.

In this environment Smith said the January Henry Hub bidweek price will likely be in the range of $5.50-6.50/MMBtu. He noted that the January Henry Hub contract closed at $5.81/MMBtu on Friday, down from $6.02/MMBtu from Oct. 16.

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