Coming off last week’s 43.4-cent decline, which broke the psychological $3 support line and notched a seven-year low, September natural gas futures underwent a little bit of a corrective action on Monday as the prompt-month contract regained 11.9 cents to close out the regular session at $2.923.

Despite no shift in the bearish fundamental picture, Tim Evans, an analyst for Citi Futures Perspective, said the market showed “some signs of life” on Monday. That said, he does not expect a prolonged rally in the near term.

“The temperature outlook will still allow storage injections at or slightly above five-year average levels and the tropical forecast still lacks any specific storm threat to production from the U.S. Gulf of Mexico,” he said. “Prices may be able to bounce on the idea that the downdraft in values over the past two weeks has left the market somewhat undervalued, but aside from an urge to bargain hunt, we don’t see conditions supporting a sustained recovery in price. At least not yet.”

One New York trader noted that the natural gas October-November spread has reached a staggering 97 cents, and if the last two years are any indication, he expects that spread to narrow by the time the November contract goes off the board. “At the end of August (2007), the Oct-Nov spread reached 99 cents, before falling to into the lower 30-cent range before the November contract expired,” he said. “Last year, the Oct-Nov spread peaked at 46 cents in early September, before it shrank to 28 cents or so when November expired. This year’s spread is now close to $1, so we could be headed for a similar situation this time around, especially since market fundamentals remain so weak.

“November is trading at roughly five to six times the normal contango cost of carry. Yeah, November is a higher-demand month, but that spread seems way out of line, especially given that storage is nearly full. The market seems to be pricing in a cold winter before we even get there.”

If the October-November spread is to decrease, a New York-based analyst believes it will be more a case of November falling closer to October prices than October gaining ground on the November contract. “I don’t know of any gas plays in the U.S. that are economic at less than $3, but because many producers are still drilling to hold onto acreage, especially in the Haynesville [Shale], prices may remain weak for some time to come,” he said.

In a note to clients earlier this year, Morgan Stanley calculated that the Haynesville Shale is the lowest-cost natural gas production region in the United States, and requires a $3.500 realized gas price to break even, assuming a 10% rate of return on invested capital.

The aforementioned analyst reasoned that because the Haynesville Shale is the lowest-cost area in the U.S. where production is still growing at a healthy clip, Haynesville production has become the short-term marginal cost benchmark. In other words, realized natural gas prices would at least have to cover the marginal cost break even price of production to remain online; “otherwise, those wells would be shut in, and the spot price would theoretically rise back to the marginal cost of production.

“But that’s not happening today, since so many producers are rushing to drill the Haynesville in order to hold acreage with production. So, many will continue to drill despite the price of gas, and that will just add to the supply problem going into the winter heating season, likely pushing November futures down with it,” he predicted.

Over the last two weeks ending Aug. 21, the September natural gas contract plummeted 87 cents from $3.674 to $2.804. During that same time, front-month crude futures went in the other direction — increasing $6.38 from $67.51/bbl to $73.89/bbl.

Analysts looking ahead at the long-term implications for low natural gas prices see a longer-term bullish future for natural gas. They also note the wide disparity between natural gas at $2.80/MMBtu and other fuels, such as petroleum at more than $12/MMBtu. “We are not there yet, but if the gas market continues to move lower, it will have a significant impact on the markets in the future,” said Mike DeVooght of DEVO Capital. He pointed out that it could affect liquefied natural gas flows to the United States; drilling and production would continue to deteriorate, and current Btu spreads would make attractive infrastructure plays as natural gas moves from production zones to end-user zones to displace distillate usage.

“All of the above factors are bullish for the long haul, but for the short term, the gas market needs some type of bullish news to help spark a short-covering rally,” DeVooght said Monday morning.

DeVooght is holding on to current recommendations. He counsels trading accounts and end-users to stand aside and producers to hold a $4.50-6.00 collar as well as a 12-month $5-8 collar at 35 cents.

With Hurricane Bill now in the rear-view mirror, is tracking waves at 25W, 71W and 55W. The wave at 55W is the most interesting, meteorologist Dan Pydynowski said. “Computer models do take a piece of this wave and try to develop low pressure along the northern end over the next few days with some models having the low east and northeast of the Bahamas being affected by the middle of the week. While perhaps initially a hybrid low, it will need to be watched for possible tropical development with time.”

©Copyright 2009Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.