November natural gas futures made it three consecutive trading days higher Tuesday despite slumping lower in overnight trading Monday. The prompt month started the day trading at its $5.460 low for the session but rebounded in the afternoon to settle at $5.759, up 11.6 cents on the day.

In addition to the bounce of the last three days, analysts were also factoring in the healthy storage situation and the potential fallout related to hedge fund Amaranth Advisors, which lost more than $6 billion in the market last month on bad natural gas bets (see related story; Daily GPI, Oct. 3).

After three consecutive days higher, some market experts were wondering whether a bottom could be forming. “The question is can we hold a bottom here or not,” said a Washington, DC-based broker. “The little rally Monday really didn’t finish that strongly, but Tuesday was a little more impressive. I am starting to get a little more bullish here.” As for the late boost Tuesday, he noted that he wasn’t sure who was behind it, but added that volumes in his shop were “fairly quiet.”

The late rally in natural gas was also a little odd as the petroleum sector showed significant weakness across the board Tuesday. November crude declined by $2.35 to close well under $60/bbl at $58.68/bbl, while November heating oil and November unleaded gasoline dropped 4.79 cents and 5.20 cents, respectively, to settle at $1.6539/gallon and $1.4567/gallon.

Looking for bullish factors that could have affected natural gas futures, the broker highlighted the Atlantic hurricane forecast reduction Tuesday by respected forecasters William Gray and Philip Klotzbach of the Colorado State University (CSU) hurricane forecast team (see related story). “It is the reverse of buy the rumor and sell the fact. Since we are in a down move, it is sell the rumor and buy the fact. You have to bet before the news is confirmed,” the broker said. “Dr. Gray’s forecast reduction should be bearish news on its face, but the market could interpret it as bullish because one more bearish card has been turned over and confirmed. The fact is that bearish factor has been taken away.”

The broker noted that a bottom could be near because the outrageous predictions have started coming out. “Some analyst was questioning whether we could see a $3 handle in futures,” he said. “It is basically crazy talk on the downside in the same way there are astronomical price predictions when the market runs high. These are sort of psychological indicators that lead me to believe that we might be in a bottoming process. We will have to see what the storage report Thursday has to say.”

Questioning whether there is any room left for natural gas futures prices to the downside, Citigroup analyst Tim Evans said late Monday that valid arguments for both the bears and bulls could be made.

“The natural gas market managed to post a second consecutive gain on Monday, which would ordinarily not be that much of an accomplishment, except that in this case was the first time it had occurred on the spot continuation chart (not counting the contract rollover) since Aug. 24-25,” Evans said. “However with no apparent shift in the underlying fundamentals, it looks to us like this bounce is primarily an attempt to pick a bottom based either on an assessment of how technically oversold the market had become or perhaps a view that the implosion of Amaranth Advisors in recent weeks has moved their former position from weak hands into strong hands, with prices now to bob back up to former levels.”

However, Evans noted that the fundamentals “show no corresponding firming trend…so we’d not be in any rush to put ourselves into Amaranth’s shoes. Storage is still rising on a track that will bring it near the estimated 3,600 Bcf in total U.S. capacity by early November, with an estimated 75-85 Bcf net injection for last week still running a touch above the 66 Bcf five-year average for the period.”

Following last week’s 77 Bcf injection report, working gas in storage levels sit at a whopping 3.254 Tcf with five weeks remaining in the traditional injection season.

As for a strategy in the current market, Evans said his Citigroup team still recommends selling January futures scaled up at $8.25 and $8.95, risking to $9.75 initially on the trade. He also suggested maintaining a $7.40 sell stop under the January futures as an alternate entry to the short side of the market, in the event the downtrend resumes. He added that Citigroup recommends a buy stop at $8.050 to limit initial risk against that entry.

Evans also highlighted the most recent Commodity Futures Trading Commission’s Commitments of Traders report, noting that the high level of open interest in this market presents an ongoing risk of long liquidation. Evans pointed out that Friday’s report showed a drop of 131,041 contracts in combined futures and options open interest for the week ended Sept. 26, but the remaining total of 1,356,047 is still 53% higher than a year ago and only one week past its all-time high. “Given the price action, the old longs must be under considerable financial strain to tough it out and hold onto these positions,” Evans said. “If they look to liquidate, we doubt there will be enough fresh buying to offset what could be a flood of selling.”

Traders are taking a close look at the premium of the spot November contract to the cash market and wondering if fundamental conditions justify such a large differential. According to NGI’s Daily Gas Price Index, gas for spot delivery to the Henry Hub Oct. 3 finished at $4.11, yet the November futures settled at $5.643, or a whopping 37% higher. “While a significant premium in the November contract is justified by seasonal tendencies for increased heating demands during the month of October, this month has started off with exceptionally mild temperature patterns across most of the mid continent region,” noted Jim Ritterbusch of Ritterbusch and Associates.

Ritterbusch views the hefty premium as a major market negative and notes that the “mild weather trends are generally forecasted to continue into the middle of next week.”

Data from the National Weather Service confirms Ritterbusch’s view. Heating degree day (HDD) requirements for major eastern energy markets for the week ended Oct. 7 are forecast to be below normal. For New York, New Jersey and Pennsylvania, 48 HDD, or 14 below normal are expected and the Midwest states of Ohio, Indiana, Michigan, Illinois and Wisconsin are forecast to see only 30 HDD, or 35 below normal. Cooling degree day (CDD) forecasts are also minimal. The Mid-Atlantic is anticipated to experience two CDD, or one below normal, and the Midwest is expected to see 10 CDD, or six above normal. Thus given the stout premium of the November contract to spot prices, the market is forecasting an October cold spell that has yet to show up in weather forecasts.

Ritterbusch is a cautious bear. “We are still viewing the $4.60 area as an ultimate downside possibility,” he said. “However, given the magnitude of the recent price decline, fresh sellers would still be advised to await price rallies back into the $5.75-$6.00 zone before establishing new shorts.”

As recently as December 2005, natural gas futures reached a Katrina-inspired $15.78 high and students of wave methodology are attempting to determine just how far natural gas futures can fall, yet still be consistent with an overall bullish price environment. “How low can natgas fall from here and still resemble a bull market correction in a larger advance?” queried Walter Zimmerman of United Energy. He said that a key retracement level at $4.44 must hold in order for the “roll over” rally (when November became the spot futures contract) to remain intact.

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