After repeated attempts over the last week to break below and stay below the $12.70 support area, November natural gas on Tuesday went in the opposite direction instead. Going against current fundamental indicators, the prompt month soared to a high of $14.375 before settling at $14.338, a level $1.334 higher than Monday’s settle. November natural gas expires Thursday.

The move Tuesday had a number of market experts scratching their heads. Hurricane Wilma did not hit Gulf of Mexico production areas and natural gas storage continues to remain above the five-year average. Possible reasons for the strength included near-term cold weather in the East and Midwest and continued robust Gulf shut-in levels. However, the most recent Minerals Management Service (MMS) report Tuesday was released after the spike began. Despite weak fundamentals, the prompt month gained over a dollar Tuesday.

The petroleum futures complex also put in a strong day. December crude gained $2.12 to settle at $62.44/bbl, while November unleaded gasoline and November heating oil climbed by 7.22 cents and 9.26 cents, respectively to close at $1.6538/gallon and $1.8899/gallon.

“The repeated attempts at breaking natural gas support really set up Tuesday’s move,” said Tim Evans of IFR Energy Services. “The logic behind this move is largely — it couldn’t go down, so it has to go up. That has been magnified by the short time left to trade November futures and options. With the time pressure involved, it really is everybody trying to squeeze through the door at once.”

Evans noted that even with the precautionary shut-ins just in case Wilma veered off course, there was only an added 200 MMcf to shut-in totals, so that really shouldn’t have spooked the market. He said that the price run-up made people wonder if Wilma actually headed up the Gulf of Mexico to Texas instead of its actual Florida course. In addition, Evans pointed out that storage is still above average, adding, “I think we may get another bearish storage report” on Thursday.

“None of it matters, because this move was all about short-term price vulnerability,” he said. “Prices are up here, but it is not because they are fundamentally compelled to be at these levels.”

He noted that a price comparison of the last five years really puts things in perspective. “If you look at our five-year average price right now, which factors in the 260-week spot continuation average, our five-year average is just under $5.45 this week,” Evans said. “So we have a price right now that is about 260% of the five-year average price with storage that is still above the five-year average storage level. That is an amazing statistic. Does this market have a little bit of a valuation problem? Yeah, you know what, I think it does.”

As to how November will expire Thursday, Evans said it is unclear. “I’d certainly be guessing if I said we are done exploiting the upside vulnerability because the momentum is so strong off of this reversal. It might be done, but I didn’t have the nerve to sell the close and I don’t know anybody who did. If you did, you better have deep pockets because there is no real limit to where the market can go in the short term because it is all about determining what’s the most that anyone can be made to pay, it’s not about a physical shortage.”

Evans likened the lofty price level to that of a house of cards. “How many stories can we build onto the house of cards?” he asked. “It doesn’t really matter that we all know the house of cards will collapse because the game right now is just about adding on another story to the house of cards and then hurrying up to take the picture.”

The November contract Monday managed a modest 13.2-cent advance on light volume, but traders were impressed that important technical support areas held despite the lower open. Speaking prior to Tuesday’s session, a New York floor trader said, “The market held above $12.68 and that was helpful along with talk of colder weather.” He added that a short-term market bottom was likely in place.

A side reason for the strength in the futures complex was shut-in statistics, which continue to rise incrementally. The MMS reported that shut-in gas production in the Gulf remained above levels prior to Hurricane Wilma. The MMS said Tuesday that 5.582 Bcf/d remains shut in, an increase over the 5.472 Bcf/d that was shut in Monday, and well above the pre-Wilma 5.195 Bcf/d shut-in figure. Pre-Katrina output from the Gulf was approximately 10 Bcf/d and 3.65 Tcf per year. Cumulative shut-in gas now stands at 348.1 Bcf.

Kyle Cooper of Citigroup is forecasting a storage injection this week of 54 to 64 Bcf. However, he suggests that given the large supply losses from the Gulf, such an injection might take on heroic proportions. “One would expect an even lower build based on MMS reported curtailments,” he said. He noted that supply will return at a slow pace and “if demand does not return at the same pace, then the supply/demand will actually turn bearish. However, that is not expected in the near term and cold weather could easily spur this market higher.”

Cooper may have a point. While a cold rain inundated the population centers of the Northeastern United States Tuesday, mountain snows blanketed the Appalachian mountains from Virginia to Maine. The National Weather Service predicts that for the week ended Oct. 29, the populous states of New York, New Jersey and Pennsylvania will receive 136 heating degree days (HDD), or 23 more than normal. The industrialized Midwest states of Ohio, Indiana, Illinois, Michigan, and Wisconsin are forecast to chill under 141 HDD, or 19 more than normal.

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