Winding down the final days of the October 2007 contract’s trading, natural gas futures traders were hesitant to pick a direction on Tuesday. With storm concerns in the Gulf of Mexico (GOM) and the Atlantic, natural gas futures held on to most of Monday’s gains to close a penny lower at $6.360, despite watching crude futures drop $1.42 to $79.53/bbl.

Some market experts said the contraction of the October-November spread is key. “What we have really been watching the last couple of days is the buying of October and the selling of November,” said a Washington, DC-based broker. “That spread, which recently had been wider than a dollar, is coming in.”

The broker noted that the GOM disturbance really is not scaring anyone, while Tropical Storm Karen is still too far out to predict. “It sounds like they are restarting a lot of oil and gas production in the Gulf, so whatever that is out there now is not perceived as a threat by anyone,” he said. “I think that with Karen being so far out, no one knows whether it is going to stay on the Atlantic side or make it through to the Gulf.”

He noted that with current price action, the bottom in natural gas futures could already be in. “We’ve been bullish on October. I think that the $5.230 low from a couple of weeks back is probably a significant low. I’d really doubt that on October expiry Wednesday we would go back and collapse lower,” the broker said. “There is a better than average chance that the seasonal bottom is already in. I don’t know who would be wanting to sell October at this point. I don’t think the contract will go out screaming higher, but I don’t think it is going to collapse on expiration either.”

Forecasters said a GOM low-pressure system “could easily become the next named tropical storm,” but it will likely pose no threat to U.S. interests. “What it will not do is barrel northward into the coastline of the United States,” said John Kocet, a meteorologist with AccuWeather.com. “The flow is entirely wrong for that to happen. This system will more than likely drift westward into Mexico later this week after achieving tropical storm status. That will ruffle some feathers down there, but there is no need for any major concern for populations along the Texas or Louisiana coasts.”

While the system in the Gulf is being mostly overlooked, Kocet noted that Tropical Storm Karen’s path and strengthening capabilities are a little bit more of an unknown. “Karen is way, way out there and is no threat to anybody for the next several days,” the meteorologist said. “That is not to say it will not become a threat; some of the biggest hurricanes of all time have come from this exact location. However, as the week progresses Karen will have an open window to the north. If the storm chooses that route, there will be no need to discuss it further. A track toward the west is the one we have to worry about, but at this time there are no signs it will do that. Karen currently has winds from 35 to 45 mph, which is no big deal. Some strengthening is likely during the next 72 hours, but explosive development into a major hurricane is not.”

Some top analysts see tropical weather conditions closely resembling year-ago conditions, but supply factors suggest that the October contract will expire Wednesday well above levels posted a year earlier. “Amidst an array of supportive forces, we are still viewing the storm factor as key to near-term price direction. And while comparisons against a year ago are looking increasingly similar in this regard, we can continue to cite several differences that would support a price floor at least 25-30% above the $4.200 expiration of the October contract in 2006,” noted Jim Ritterbusch of Ritterbusch and Associates.

Ritterbusch contends that a key supportive factor is the changing supply situation. He added that the supply surplus against average levels is eroding while a year-over-year deficit has been reestablished even amidst a relatively subdued hurricane season.

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