October natural gas futures continued to probe upside resistance after the long holiday weekend, but for at least one market observer, the move higher “lacked enthusiasm.” The front-month contract climbed 7.9 cents Tuesday to close at $2.807.

Since recording a new low for the down move Friday of $2.409, the October contract has jumped 39.8 cents. However, traders appear unimpressed, citing an unchanged fundamental picture. “The fundamentals in the gas market remain bleak,” said a New York trader. “Storage levels are still healthy, demand is still weak and the Gulf of Mexico is still hurricane-free. Sure, prices are pretty low on a historical scale, but we are going to need something significant in order to turn things around. I’m not convinced that we’ve seen the lows.”

Citi Futures Perspective analyst Tim Evans said the market as it stands currently is tricky to trade in. “The natural gas market continues its struggles, with insufficient current demand or storm threats to production from the Gulf of Mexico to support the front end of the curve, even as the forward market attempts to track higher in sympathy with [Tuesday’s] petroleum rally,” he said. “With no storms lined up for entry of the Gulf of Mexico and the historical distribution of storms peaking on Sept. 10, the storm risk will be declining in the weeks ahead.

“At current levels, we think October futures look cheap but that November futures might still be expensive, making it difficult to devise a confident outright trade. Even a bet on the October-November spread looks risky, with market timing a premium skill.”

Industry insiders were still digesting the Commodity Futures Trading Commission’s (CFTC) new and improved Commitments of Traders (COT) report Friday for activity through Sept. 1, which is aimed at providing more detailed information on the different categories of market participants and their positions (see Daily GPI, Sept. 3; July 8). The new report breaks the data into four categories of traders: Producer/Merchant/Processor/User; Swap Dealers; Managed Money; and Other Reportables.

Taking a look at the CFTC’s new disaggregated COT report, Evans said the breakout might not be as informative as billed because it reflects only the positioning in the original contract that accepts physical delivery and does not reflect the swaps contracts.

He noted that because the new report shows swaps dealers holding 122,777 contracts (12.9%) of the long open interest against 90,399 contracts (9.5%) of the short open interest and that the money managers segment of the report is holding 133,925 contracts (14.1%) of the longs and 189,856 lots (20%) of the shorts, there would seem to be some “vulnerability” to higher prices if the market were to reverse. “However, given that we see a similar net short result when we chart the reportable, noncommercial positions but a net long position when we include the swaps, we would not rely too heavily on what the ‘disaggregated’ breakdown for just the physical contract shows,” Evans said.

Looking at the old-style COT report, which the CFTC has said will continue to be released at least through 2009, Evans pointed out that the falling total open interest and the declining net long positions in the reportable, noncommercial category both suggest that prices have been falling on stale long liquidation, not fresh selling. “Ultimately, we think this will prove constructive, with prices able to rebound easily on a combination of short-covering and fresh buying once the current trend has been exhausted,” he said.

Traders studying the forward curve see prices way out of whack. “There are some remarkable trading opportunities right now in this market. The difference between October and November futures is more than a dollar per MMBtu,” noted an East Coast analyst. Not only are October and November contracts out of alignment, but January, February, March and April are also out of sync.

“The difference between January and February is 6.5 cents, with March half a cent above February,” the analyst said Tuesday morning. “One or two of these differences is way out of line. Those who have storage should be buying material, storing it and selling December or January against it. At the same time, it might make sense to buy March or April (selling more December or January in a butterfly spread).

“To make a long story short, some of the pressures on the front month are likely to reassert themselves — unless the differences return to more normal figures. The spreads are hideously out of line, and that suggests opportunities for those with storage. These spreads are the mirrors in which one can clearly see the monster that has manifested itself in the overzealous selling of the front month. The fact that these spreads now offer such bizarre opportunities for commercial traders underlines the speculative nature of the selling.”

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