At first it looked as though November futures were going to settle above the psychologically important $5 level, but the realization that the primary near-term market driver — forecasts of colder-than-normal weather — had been fully discounted was enough to pull the plug on prices.

November futures shed 10.7 cents to $4.880 and December dropped 9.6 cents to $5.627. November crude oil added 47 cents to $70.88/bbl.

According to forecaster WSI Corp. of Andover, MA, temperatures across the eastern half of the country are expected to average 5-11 degrees below normal next week Except for perhaps the Gulf Coast, temperatures across the eastern two-thirds of the country may still run colder than currently forecast, especially through mid-week.

Quantitative traders who rely on pattern matching to make their buy and sell decisions will be taking a close look at what the market does from this point.

“At present our analyses show the longer-term trend of the market as neutral, but in the intermediate term a lot will depend on how the market trades from this point,” said a Texas fund trader. He said that if the market “grinds lower in a stair-step pattern” that would be neutral for prices and give some force to the argument that $5 is significant technical resistance. On the other hand, if the market fell hard for 30 cents or so and then rallied 10 cents, that would be a near-term buy signal.”

Others see the day’s failure to hold initially strong prices as indicating a possible slide back to $4. “Overall, today’s reversal reinforces our view that an eventual price decline toward the $4 area is still possible,” said Jim Ritterbusch of Ritterbusch and Associates. He cautioned that such an outcome may require “an almost perfect storm of zero storm activity and storage availability issues that force some involuntary production cuts.

“Also noteworthy is a weak physical trade in which cash values are at an unusually large discount relative to the nearby screen. While we would note the difference between next-day cash values and the futures contract that won’t expire for more than three weeks, we still view the current cash basis as accommodative toward short hedge placement into November futures,” he said.

IntercontinentalExchange (ICE) reported that Henry Hub cash prices settled at $3.23, up 34 cents.

Others are more circumspect about whether a further decline to $4 is a done deal. “At this time the fundamental news has not changed all that much. It has been our experience that the news is always the most negative at the bottom and most bullish at the top,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. He pointed out that the fundamentals of the market have been quite bleak for quite some time.

“The question now is will the implosion in drilling activity, the steep decline curve and the steady demand (because prices are so cheap on a Btu basis) be enough to change the psychology of the market. It has been our feeling that it was just a matter of time before we would get a violent short-covering rally. Now that the rally has, and is occurring, time will tell if it will be enough to take the sellers out of the market.”

Some traders were still scratching their heads over the fact that CME Group changed the October expiration last Monday by one tick from $3.729 to $3.730 (see Daily GPI, Sept. 29).

“It was good for the bulls, bad for the bears, but no one knows why it occurred,” said a Washington, DC-based broker. “I don’t know whether it was a miscalculation or what, but there was no explanation.

“The October settlement was changed by one tick, which is the equivalent of $10 per contract,” the broker added. “Of course there are tens of thousands of contracts that were affected, so even though it is only $10, it could certainly make a difference. I had one client who was all worked up over this. The good news is it did not affect any options strikes. It’s not like it went from $3.999 to $4, thus putting some options into the money and triggering other obligations.”

CME Group was not very forthcoming with information. “I can confirm that the price was changed,” said Anu Ahluwalia, associate director of commodities for CME Group. However, she said she was not sure why the change was made or when exactly it took place.

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