Amid three distinct selling surges, natural gas futures returned to pre-hurricane (Isidore and Lili) levels Thursday as traders grappled with a one-two combination of bearish news. The first blow came before the open when traders learned that Hurricane Lili had weakened prior to landfall. Still reeling from that, traders were again stymied upon learning that a greater-than-expected 47 Bcf was injected into storage last week, according to the Energy Information Administration. Then after holding support at $3.78 for much of the afternoon, the November contract broke lower in the final 30 minutes of trading. It closed at $3.724, down 43.6 cents for the session and more than 50 cents beneath its $4.25 peak notched during the height of the hurricane hype Tuesday.

As late as 11 p.m. EDT Wednesday night, Lili was still sporting winds of 145 mph, according to the National Hurricane Center. At that time, the NHC was not calling for any significant weakening, only minor fluctuation of intensity. It appeared as if Lili would make landfall as a major Category 3 or greater hurricane, marked by sustained winds of 111 mph or greater. However, at 5 a.m. EDT, Lili, which was 95 miles south of New Iberia, LA, was downgraded to a Category 3 storm with 120 mph winds. By 7 a.m. EDT, the storm made landfall near New Iberia as a lowly category 2 hurricane with winds barely nudging the 100 mph mark.

After opening 16 cents lower at $4.00, the market tumbled an additional 11 cents in the first 30 minutes of trading. Then, upon the release of the storage report, bears knocked another dime off the November futures price.

Working gas in storage was 3,038 Bcf as of Sept. 27, according to EIA estimates. This represents a net increase of 47 Bcf from the previous week. Expectations had centered on a net build of 35-45 Bcf. Stocks were 113 Bcf higher than last year at this time and 277 Bcf above the five-year average of 2,761 Bcf. In the East Region, stocks were 80 Bcf above the five-year average following net injections of 39 Bcf. Stocks in the Producing Region were 141 Bcf above the five-year average of 726 Bcf after a net injection of 7 Bcf. Stocks in the West Region were 57 Bcf above the five-year average after a net addition of 1 Bcf.

With storage now at more than 3 Tcf and demand only slightly bullish, Kyle Cooper of Salomon Smith Barney believes that if there is little or no permanent damage to gas infrastructure prices may continue to see weakness. Although he has yet to see the total amount of production shut-in because of Lili, Cooper’s early call is for next week’s storage report to feature another build in the mid-40s Bcf.

Alternatively, after watching the market drop to levels not seen since before “Isidore” and “Lili” became household names, Jay Levine of Advest Inc. would not rule out a “pop” to the upside. Should one occur, he targets resistance in the high $3.80s/low $3.90s initially, with a secondary ceiling at the psychologically important $4.00 level.

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