After being “goosed higher” by the rapid development of Tropical Storm Fay in the Gulf of Mexico Friday morning, natural gas futures were hit with a wave of profit-taking late in the session as traders came to the realization that the storm would produce little more than soaking rains. By virtue of its 7.7-cent loss Friday, October’s $3.265 close was not only below the prior Friday’s settle, but also in the lower half of its $3.100-445 trading range for the week. At 103,385, estimated volume was heavy for the session.

Despite causing only minor onshore production shut-ins (and virtually no offshore disruptions; see related story), Tropical Storm Fay caused quite a stir Friday by becoming the sixth named storm of the Atlantic hurricane season and only the second to develop in the gas-rich Gulf of Mexico. However, with maximum sustained winds of only 60 mph, Fay’s threat was mainly that of flooding as she was expected to dump as much as 15 inches of rain across parts of East Texas.

For George Leide of Rafferty Technical Research in New York, the storm came at a time when the technical and fundamental outlook was already very constructive. “By bouncing off the $3.10 area [Thursday], we put in a double bottom on the daily chart. That, combined with more saber-rattling in the Middle East and now this storm in the Gulf, was more than enough to bring out some new buyers [Friday] morning.” Leide was right and by 11:30 a.m. October natural gas was trading at $3.445, up 10.3 cents for the session and just beneath a technical ceiling at $3.46-52. Crude oil was higher as well, having broken above the $30.00/bbl mark Friday morning.

However, neither the gas nor the crude oil markets could sustain the strength and both dipped lower in afternoon trading. For Tim Evans of IFR Pegasus in New York, the sell-off was a welcome sight and consistent with his longer-term outlook. “The natural gas market scored further early gains, helped along by the further sharp advance in the petroleum complex, but faded from there, consistent with the idea that recent strength was only an upward technical correction within a developing downtrend,” he wrote in a note to customers Friday.

In daily technicals, Evans sees minor buying at $3.20, followed by the aforementioned $3.10 low from last week. “Once this floor fails, we expect the market to take out the psychological support at $3.00 and the $2.925 low from August 15, putting October on track to revisit its $2.685 low from August 7.” To take advantage of this expected move, he has sell stops at $3.18 and $3.08 to scale into a full short exposure. A buy stop at $3.36 would limit his initial risk.

However, many feel that the market will have a tough time breaking below the $3.10 level. In addition to the obvious double bottom on the daily chart at $3.10, October’s 40-day moving average is seen at $3.07. It is likely that traders will use any further decline toward these levels as a buying opportunity. Add to that the fact that the non-commercial segment of the market now holds an almost flat position (2,824 net short as of Sept. 3), according to the latest Commitments of Traders Report. Although not a 100% indicator, the migration of these fund traders from net short to virtually flat usually precedes an accumulation of net long positions. And, if history holds, this long acquisition will translate to higher futures prices.

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.