Following a down day Monday, September natural gas futures shot higher Tuesday morning despite bearish fundamentals, which left some market participants scratching their heads. Despite moderating temperatures nationwide and nearly no activity in the tropics, the prompt month reached a morning high of $7.24 before easing off in the afternoon to close at $7.158, up 25.1 cents on the day.

More bearish news hit the market Tuesday when the National Hurricane Center downgraded its Atlantic hurricane forecast for the season (see related story), following in the footsteps of the Colorado State University hurricane forecast team a week earlier (see Daily GPI, Aug. 4).

Despite all of the bearish factors, one market expert pointed to strength in the cash market as reason for Tuesday’s rise in futures. “The strength in the cash market Tuesday really came as a little bit of a surprise and that might be buoying futures,” said Ed Kennedy with Commercial Brokerage Corp. in Miami. “My guess is they are buying the gas for storage. It appears that some areas pulled storage out last week and they are now replacing it.

“It really caught the local traders short and there was some trade buying in futures that came in because of cash,” he added. “We sort of back-and-filled for the rest of the day following that initial rally. The cash is the thing…weather is not the issue. It looks like we are getting moderating temperatures everywhere. Storms are also not the issue, at least until Friday. There is one wave out there, but who knows if it will develop. Weather is taken off the table but cash is still holding in there. If it is not weather and it is not storms, then it has got to be storage.”

As for his current trading strategy, Kennedy said he sees lower prices. “I am looking for a place to sell this thing,” the broker said. “I have a feeling there is more downside here, especially once the impact of moderating temperatures starts to affect things. On a technical basis, there may be a tad more to the upside, but I would be looking for a place to sell it.”

According to AccuWeather, cooler air from Canada is expected to bring welcome relief to the Northeast that is expected to last for a while. “An area of high pressure moving through the Great Lakes will spread the drier and comfortable air into the region,” says Kristina Baker, AccuWeather meteorologist. She added that most areas experienced near-normal temperatures this past weekend, and this week’s comfortable air is expected to last even longer as temperatures will stay near or below normal through the end of the workweek. “On Thursday, however, thermometers and humidity will rise a bit ahead of another cold front, but to values nowhere near last week’s oppressive heat.”

Like Kennedy, some traders think the market has some more downside to it. “We remain reluctant to suggest that short-term price lows have been placed, given the fact that the temperature factor has moderated appreciably,” said Jim Ritterbusch of Ritterbusch and Associates. He added that his company is maintaining a broad based trading approach that “allows for additional price declines to as low as the $6.40 area. But at the same time, we feel that the recent 30% contraction in the storage surplus precludes a return to a $5.00 price handle unless temperature patterns remain unusually mild and the storm season proves relatively subdued.”

Others are more positive. “The reason I am more bullish than bearish is that the market all summer has been going through a series of sharp rallies that collapsed and made new lows lower than the point at which the rally began,” said a Washington, DC technical trader. He said this last rally in mid-July was “a small rally, it collapsed back for two days, and the August chart did not show a new low.” He conceded that his bullishness would not be warranted if September futures were to fall lower than the high of $6.60 reached on July 14. “If the market falls below that, something else is going on,” he admitted.

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