Despite strong Wednesday morning trade, which made it seem that the natural gas futures rally would last a third consecutive session, the October contract hit its peak just before noon before trailing lower for the remainder of the regular session, closing at $2.829, up 2.2 cents on the day.

After gaining a total of 29.9 cents on Friday and Tuesday, the prompt-month contract looked ready to add another chunk of change Wednesday as it ran up to a high of $2.998 at 11:45 a.m. EDT. However, the party stopped there as October’s lights dimmed for the rest of the session, marking a low of $2.809 before closing out the session.

“Sure, we saw the third straight day of a higher close, but it really gave back most of the day’s gains and only settled two pennies higher,” said a Washington, DC-based broker. “I was not impressed by the close and it did not lend much confidence to the idea that we might travel much higher in the near term.”

The broker noted that there was some bullish talk swirling around a Goldman Sachs report that claimed demand for distillate fuels is stabilizing, so a strong rebound in demand, and therefore price, is expected. “If in fact the demand for liquids started to move up, so too would the demand for gas for manufacturing,” he told NGI. “That said, none of my industrial clients are talking about any sort of improvement in business. The best they can say is: ‘It’s not getting any worse.’

“Underlying any talk of a demand resurgence are the hard facts. We still don’t have any weather to speak of, storms to watch out for, or demand growth to herald. We also continue to see significant gas inventory builds, so there is not much to get enthusiastic about if you are a bull. We are still a bear on this thing and view these small rallies as relieving a certain amount of oversold. I believe we’ll test that $2.409 low again from late last week.”

The broker noted that the front-month contract’s current relationship to the out months is very interesting. “If you compare the current price with the one-year strip, they more or less follow each other. In other words, the front month is not that different than the following months,” he said. “However, since the beginning of the year, the front month continues to show tremendous weakness and it is obvious that producers have not followed through because the differential between the front month at $2.840 and the back month at $4.800 is nearly $2. If I’m a buyer in the more distant months, I’ve already given up $2 worth of gain. If I were a seller, I would think I would be locking in these kinds of values because until we see some dramatic improvement in demand or a severe cutback in supply, the second month will always come down to replace the first month when it becomes spot.”

Looking into expectations for Thursday morning’s natural gas storage report for the week ending Sept. 4, most industry estimates appear to be for a build in the high 60s Bcf to low 70s Bcf. A Reuters survey of 23 industry players produced a range of build expectations from 59 Bcf to 100 Bcf with the average expectation coming in at 73 Bcf. Bentek Energy is projecting that the Energy Information Administration (EIA) will reveal an injection of 69 Bcf, with a 50 Bcf injection in the East region, a 20 Bcf injection in the Producing region and a 1 Bcf draw in the West region. The research firm said it expects record inventories with stocks to end the season above 3.9 Tcf, assuming injection rates for the rest of the season are at the five-year average.

“For the second week in a row the supply and demand report is implying [that] injections are much higher than those indicated by the sample of storage facilities,” Bentek said in its weekly storage note. “Last week the supply and demand model showed a significant decrease in power generation, and implied the resulting excess supply went into storage. The EIA storage report supported this assumption, but the Bentek sample of storage facilities was in disagreement, and did not show any signs of significant increases in injections. This week the Bentek sample did show a significant week-on-week increase in injections but not to the extent implied by the supply and demand report.”

The number revealed by the EIA at 10:30 a.m. EDT Thursday morning will be compared to last year’s 63 Bcf addition for the similar week and the five-year average injection of 67 Bcf.

In spite of the recent gains, top traders don’t see the natural gas market breaking out of its pervasive bearishness any time soon. “All in all, the natural gas market has been one of the most relentless bear markets we have ever seen,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. In his view, breaking out of the bear market will require “a real pick-up in demand, a major hurricane event or a significant production decline caused by shut-ins or some nonweather-related pipeline disruptions. We do not anticipate this and will hold on to our current positions.”

DeVooght counsels end-users and trading accounts to stand aside and producers and physical market longs to hold an October $4.50-6.00 collar as well as a 12-month $5-8 collar for 35 cents.

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