After extending to new 18-month highs on forecasts calling for cool weather through the rest of the month, natural gas futures reversed lower yesterday amid weakness in the nearby crude oil pit. For the gas market, the selling came in two distinct surges — one in the late morning hours and the other near the 2:30 p.m. EDT closing bell. The November contract finished at $4.157, down 8.2 cents for the session and a whopping 26.3 cents off its new high.

According to the latest six- to 10-day forecast released Monday by the National Weather Service, the below normal temperatures that currently exist across much of the country are expected to continue through at least the beginning of November for the eastern two-thirds of the country. After opening at $4.285, the November contract took just an hour to break above last Thursday’s high at $4.38. However, just as natural gas was making new 18-month highs, crude oil was making new 7-week lows on news reports that the Bush Administration would compromise with a United Nations resolution on Iraq. November crude finished at $28.37, down $1.23 for the day and well below its recent $31.20 top notched late in September when war with Iraq was considered a strong possibility.

Another factor that may have capped the rally in gas prices yesterday was bearish expectations ahead of this Thursday’s storage report. Revising his 25 Bcf injection estimate from late last week, Kyle Cooper of Salomon Smith Barney now calls for a 18 to 28 Bcf injection for the week ending Oct. 18. That would be below last year’s 32 Bcf refill, thereby decreasing the year-on-year surplus. According to the Energy Information Administration, the year-on-year surplus currently stands at 60 Bcf, the narrowest it has been thus far this year.

Traders also see constructive technical features. Chalking Monday’s action up to the ebbs and flows of volatile trading in the natural gas arena, a Washington DC-based broker looks for the market to hold at or near current levels. “We could move down to the $4.00 to $3.80 area, but as long as that area holds, we look for another attempt at the highs. We are still in the uptrend,” she reasoned. Specifically, she targets $4.95 level, which corresponds to 38.2% Fibonacci retracement of the move down from the December 2000 $10.10 high down to the September 2001 low at $1.76.

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