After navigating the long holiday weekend without a market-affecting event, natural gas futures traders — who had covered some shorts Friday to mitigate risk — let some air out of the balloon on Tuesday as the October contract closed at $3.852, down 8.7 cents from Friday’s finish.

On Friday the front-month contract shot 18.8 cents higher to $3.939 as the three-day weekend left plenty of time for a storm to gain strength and threaten the Gulf of Mexico’s oil and gas infrastructure. While Tropical Storm Hermine did develop, it spared the Gulf of Mexico and made landfall on the Texas-Mexico border.

While some market watchers acknowledged Tuesday’s decline, they noted that they see a base-building period unfolding over the longer term. Some top analysts suggest that recent fluctuations within a relatively narrow price range may augur higher prices, eventually.

“From a longer-term perspective, this market could be in [the] process of building a bottom to be followed by a strengthening pattern through September and the fourth quarter similar to that of last year,” said Jim Ritterbusch of Ritterbusch and Associates. He cautioned that “the late December highs of 2009 of around $6 would appear stretched by at least a buck in view of production levels that could prove to be more than 3% above year-ago levels through the September-December period.”

For the five trading days ended Aug. 31, directional traders, those focused solely on the markets next price move and not concerned with offsetting or hedging a physical position, heavily increased exposure on both the long and short sides of the market with a modest edge going to the shorts, according to government figures.

The Commodity Futures Trading Commission in its Commitments of Traders Report for Aug. 31 showed increased open interest by managed money in both long and short natural gas futures and options contracts. At IntercontinentalExchange (ICE) long futures and options (2,500 MMBtu) rose 31,836 to 287,789 contracts and shorts rose by an even greater 47,174 contracts to 146,192. At the New York Mercantile Exchange long futures and options (10,000 MMBtu) increased by 5,462 to 146,888 and short holdings gained 3,838 to 218,449. When adjusted for contract size long positions increased 13,421, but shorts rose by 15,631 futures and options contracts combined. For the five trading days ended Aug. 31 October futures fell 24.3 cents to $3.816.

The Gulf and Atlantic basins remain active in quantity if not quality of storm development. With Hermine already in the rear-view mirror, the National Hurricane Center (NHC) is watching three other low-level systems in the Atlantic. What is left of Gaston is cloudiness and showers southeast of Puerto Rico, and NHC gives it a 20% chance of development in the next 48 hours. Two other westerly moving systems are also pegged with 10% and 20% chances, respectively, of turning into a tropical system; one is an area of low pressure about 350 miles west of the Cape Verde Islands, and the second is composed of showers and thunderstorms associated with a tropical wave between the Cape Verde Islands and the coast of Africa.

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