November natural gas futures’ first regular session action as the front-month contract was to do almost nothing, according to one broker following Tuesday’s trading. While the contract traveled within a fairly large 37.7-cent range on the day, it ended up closing at $4.875, up 4.5 cents from Monday’s finish.

“Normally you see the new prompt-month contract race to the general vicinity of the just-expired month, but that was not the case Tuesday,” said a New York trader. “On Monday October futures terminated at $3.730, and the November contract closed at $4.830. On Tuesday the November contract moved higher, widening the gap to the expired October contract and to the underlying cash market value.”

A Washington, DC-based broker called Tuesday’s trading “lackluster,” noting that the actions were “eerily” quiet. “The interesting news is the difference between November and the out months. There is a large gap between the front months and December, January or February, which closed Tuesday’s regular session at $5.674, $5.954 and $5.980, respectively. Folks are going to want to keep their gas in storage till later if they can, which is not a very good sign at all for the bulls.

“The other interesting aspect is the premium futures have over the cash market. We might be in a situation where futures hold cash up a bit here, or futures will head lower to cut the difference. As of right now it is unclear which will budge first.”

Analysts view the weak expiration of the October gas futures contract as one sign of weakness. “But more importantly in our view was [Monday’s] pre-expiration expansion in the front switch contango by some 14 cents,” said Jim Ritterbusch of Ritterbusch and Associates. In his view, the widening of the October-November contango “has served as a wakeup call to the fact that the market will still need to contend with a record supply level that is likely to challenge storage availability in some regions during the coming month.”

Ritterbusch views the market as vulnerable down to the $4 level but admits that “such a pullback will be met by another round of fund short-covering that could easily prompt a renewed price rebound back to above the $5.100 mark. In short, we expect price volatility to become more two-sided going forward with daily price swings becoming more pronounced amidst injection and evaporation of storm premium as well as increasingly wide swings in the equities.”

Stephen Smith of Stephen Smith Energy Associates said the supply-demand equation is playing out somewhat differently than first expected. “Our original view was that some combination of near-full storage, and pipeline OFOs resulting from high pressure, would put downward pressure on cash prices in advance of the fall storage peak,” Smith said in his weekly research note. “This downward price pressure would have then incentivized producers to reduce output so as to live within available storage. But oddly enough, cash prices bottomed out at $1.84/MMBtu three weeks ago and closed at $3.60/MMBtu on Sept. 25. What may be occurring is that linepack increases and growing OFOs may be disproportionately accomplishing the task in which we had expected low-price-driven producer shut-ins to play a much larger role.”

Smith noted that firming cash prices could be due to the market’s conclusion that growing OFOs “have been acting, and will continue to act as a temporary de facto ‘OPEC production cut’ to effectively constrain production and reduce the storage surplus in the process.”

Looking ahead, Smith said his base case price outlook would put a record 3,811 Bcf in working gas storage on Oct. 30. He said a likely December Henry Hub bidweek price range under the base case outlook would be $4.50-5.50 with a midpoint of $5, which reflects a 25-cent increase from his estimate in the previous week.

Although cooler fall weather is eventually expected to make an appearance, weather bulls may have to wait for any weather premium. The National Weather Service forecasts that for the week ending Oct. 3 a lower-than-normal accumulation of heating degree days (HDD) is expected across a broad swath of the Northeast and Midwest. New England is anticipated to have 59 HDD, or nine fewer than normal, and New York, New Jersey and Pennsylvania are forecast to see 51 HDD, or two fewer than the seasonal norm. The Midwest should expect 50 HDD, or five fewer than its norm.

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