Bringing some form of reasonableness back to the natural gas futures complex, the November contract started the week by giving back a small percentage of the sizeable gain recorded last week. The prompt month, which expires Wednesday, settled down 21.5 cents at $7.89.

While the decline on the day was small in comparison to last week’s $1.40 run-up (see Daily GPI, Oct. 25), some took the decrease as a sign that November futures might expire lower.

“If anything, I would say that [Monday’s] weakness is a combination of some light profit-taking in the heating oil market, which sort of undercuts the bullish sentiment on the natural gas side of things,” said Tim Evans of IFR Energy Services. “It also looks like the temperature outlook for this week is not quite as cold as it was a week ago, which kind of undercuts the cash market a little bit. Maybe this lets the November contract go off the board softer rather than stronger.

“I do think that having a little less of a heating load on the market does weaken the cash market, which takes some of that short-covering edge off of the November contract and prompts those traders that are still in long positions to exit the market a little more urgently,” he told NGI.

Evans noted that while he sees a little bit of weakness here that could be the start of a bigger decline, he doesn’t believe that the futures market is letting go of that premium that was built into the price yet. “Is this the ‘colder-than-normal winter’ premium, or is this the ‘Hurricane Ivan’ premium? Evans asked. “I don’t have a catchy name for this, so it is the ‘October 2004’ premium.”

He said the one viewpoint that has been driving prices is this idea that it is going to be a colder-than-normal winter and therefore the near record storage surplus doesn’t matter. Evans discounted this theory, saying that supplies appear adequate, and are not “tight,” as some market-watchers have recently stated to the media.

Turning to December futures, the analyst said the downturn from a new $9.15 high hints at reversal in December natural gas, but it will take a drop through Friday’s $8.67 low to confirm it, which would put pressure back on the failed resistance and confirmed support at $6.38-6.42.

The December contract dropped 17.2 cents Monday to settle at $8.822, while January through March experienced decreases of 13.2-15.2 cents.

“[December] uptrend support at $8.20 and prior lows of $7.685-7.78 and $7.40 become possible short-term targets once the washout comes,” Evans said. “We certainly doubt there is a comparable $1.75 of additional upside risk here. If prices were to resume their recent intermediate-term advance beyond $9.15, we see the $9.429 channel resistance as the next clear obstacle, followed by prior spot highs at $10.10 and $11.899.”

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