There was no encore performance by bulls. Following a four-day, 41-cent rally off Monday’s lows, natural gas futures eked out a small advance in quiet trading Friday. The September contract, which will expire Wednesday, was held to an extremely tight 5.5-cent trading range. It settled at $5.28, up 0.5 cents for the session and within striking distance of Thursday’s new one-month high at $5.34.

Friday’s calm gave traders and market watchers the opportunity to sit back and survey the situation. Since putting in a $4.58 bottom in the end of July, gas futures have chopped higher on hurricane concerns, bullish technicals and the market’s seasonal tendency to move off a low notched in the beginning of August. Ironically, however, the market’s biggest moves over the last four weeks have come courtesy of seemingly bearish storage data released each Thursday. Last week was no exception as the September contract rallied nearly 16 cents on another large storage refill.

According to the Energy Information Administration, 78 Bcf was added to underground storage facilities during the week ending Aug. 15, bringing the level of working gas to 2,266 Bcf. Although the 78 Bcf refill came near the bottom end of the absolute range of expectations focused on a 75-90 Bcf figure, it was inline with the common range of expectations clustered in the 75-80 Bcf area.

While the report could be construed as neutral or even a bit bullish versus expectations, it was undoubtedly bearish versus historical figures. Last year at this time the market only injected 37 Bcf and the five-year average build is calculated at 57 Bcf. Accordingly, the deficit to last year (391 Bcf) and the five-year average (182 Bcf) continued to shrink with the report. With 11 weeks left in the traditional injection season, the market needs to inject 67 Bcf a week to reach the 3,000 Bcf target by Nov. 1.

“As stated [Thursday], we do believe the EIA report was actually quite bearish and that eventually prices will indeed head back below $5.00 in the coming weeks,” wrote Citigroup analyst Kyle Cooper in a note to customers Friday.

Meanwhile, UBS Warburg analyst Ronald Barone doubts that gas prices will “collapse” this year. Wellhead decline rates continue to accelerate. UBS estimates that first-year decline rates on average U.S. producing wells have increased to 28% from 25% in 2000 and 23% in 1998. “Moreover, our E&P team continues to call for a 2.1% decline in 2003 lower 48 production (to 49.3 Bcf/d) on the heels of an estimated 6.9% decline in 2002.” UBS expects a 2.1% production decline in Canada this year (see related story).

Although Barone admits the rig count continues to grow, UBS maintains that reserve additions per rig continue to decline, and the lag time for production from new rigs will delay any production impact by 12-18 months.

So how does one reconcile an increasing supply of storage gas amid a purported supply crunch? “[At 3,000 Bcf], storage gas only accounts for one-seventh of annual consumption,” notes a Washington, DC-based broker. “You don’t satisfy all demand through inventory. Just because storage supplies are considered ‘adequate’ doesn’t mean you are going to have enough gas when demand really picks up.” Take last winter for example, he continued. Even with storage full heading into November, weather-related demand and low production drove prices higher. “The burden is on the bear trader to prove $5.00 prices are not sustainable.”

So the bears sit and wait for their turn to drive this market. But with gas apparently locked into its historical tendency to rally on concerns heading into winter, that selling opportunity may have to wait until more is known about winter weather. “I have been asked three or four times a day for the past couple weeks when winter forecasts are due out,” the broker continued. “There are a lot of people out there looking to see just how woolly the caterpillars are this fall.”

In daily technicals, September has overhead resistance at Thursday night’s $5.38 Access session high, which corresponds with a 38.2% retracement of the $6.68 to $4.58 correction. Should that level hold early this week, most technicians look for at least a partial correction of the recent rally. If the psychologically important $5.00 level, fails to hold, look for more buying in connection with the Aug. 14 low of $4.79. Above $5.38, a 50% retracement of the move would provide resistance at the $5.61 area.

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