After plumbing to a new 29-month prompt month low last week, natural gas futures finished on a neutral note Friday with a modest decline in the front month, contrasted by slight up-ticks in the out months. The October contract closed at $2.103, down 3.4 cents for the session, but off its new life-of-contract low notched Thursday at $2.03. Meanwhile, the 12-month strip posted its second-straight positive close, gaining 0.8 cents to $2.836.

With so much uncertainty surrounding not only the U.S. economy, but also the global energy markets, natural gas traders opted to stay mostly on the sidelines last week. That enabled pent-up selling following the three-day Nymex trading halt to pressure prices lower early last week. However, as the market approached the psychologically important $2.00 level, it was greeted with an ever-increasing amount of scale-down buying, which put a stop to the price slide. The spot month at Nymex has not traded below $2.00 since April 1999.

Looking ahead, traders are quick to note that there is no real precedent for what natural gas futures prices will do in a time of sustained military conflict. Prices spiked from the mid-$1.00s to the mid-$2.00s during the fourth quarter of 1990 amid heightened tensions ahead of the U.S-led attack on Iraq. However the campaign was short-lived and by March of 1991 prices were back down below where they were prior to the offensive. Moreover, the economic picture this time is much different, prompting some to suggest that in order for the U.S to carry out the President’s pledge to eradicate “every terrorist group of global reach,” it will need to conduct deficit spending, which could lead to inflation, which in turn could produce higher energy prices.

In the meantime, perhaps the largest piece of the puzzle is what the speculative trading funds will do with their large net short position in natural gas. While not ruling out further selling, Tom Saal of Pioneer Futures in Miami believes the funds might look to take some of their profits here. “Up until the past week, everything was focused on storage and the short-term price outlook. Now there is a growing awareness that the long-term picture has changed. It is that uncertainty that could prompt funds to cover.”

At 35,278, the net short position held currently by the funds or non-commercial segment of the market is the largest since August of 1998, according to the Commitments of Traders data from the Commodity Futures Trading Commission. When the funds began to cover their positions back in August of 1998, they did so quickly, driving prices off a $1.61 floor up to the $2.50 area in just over a month.

According to the American Gas Association, 90 Bcf was injected into the nation’s gas storage facilities during the week ending Sept. 14, lifting supplies to 84% of full capacity. While some traders noted that the refill was bearish because it exceeded both last year’s 67 Bcf injection, as well as the five-year average refill of 77 Bcf, others suggested it was bullish because it fell near the lower end of the 85-100 Bcf range of expectations. The injection increased the year-on-year surplus to 432 Bcf, putting additional downward pressure on prices.

Notwithstanding this gloomy fundamental outlook, Tim Evans of New York-based IFR Pegasus is cautiously bullish, at least for the short-run. “Prices are showing some loss of downward momentum, and an upturn past $2.15 would allow October futures to retest failed support at $2.25 as resistance. The price gap at $2.30-35 is an alternate target for an upward correction. We think bullish news would be needed to propel prices as far as the higher $2.44-54 gap or the $2.72 high from [the prior] Friday’s trade. On the downside, Thursday’s $2.03 low has been allowed to stand as minor support. We anticipate more buying interest in the $1.90-2.00 zone, as much from short-covering or rolling pressure on the nearby October contract ahead of [this] week’s expiration, as from anything else,” he said.

Nymex will be open under abbreviated sessions again this week, with regular open-outcry trading set to run from 10:30 to 1:45 (EDT) each day, except Wednesday, which will be open until 2:45. Internet-based Nymex Access will continue to be available from 5 to 8 p.m. (EDT), Sunday, Monday, Wednesday, and Thursday evenings and will be open for trading from 4 to 8 p.m. (EDT) Tuesday evening. Trading on the platform will also be available Monday through Friday morning from 5 to 9 a.m. (EDT).

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