The October natural futures contract plateaued at $3.467 at the end of regular trading Friday, up 13.8 cents from the prior day on a major rebound off a key support level on Thursday at $3.19. Observers pointed to a strengthening in the overall petroleum complex Friday due mainly to Iraq’s rejection of renewed United Nations inspections. In addition, Tropical Storm Hanna in the Gulf of Mexico was forcing some minor production curtailments, and some technical factors were helping to channel futures prices higher.

The hard technical bounce Thursday left October at $3.329, up 7.9 cents by the end of trading and 13.9 cents off its new low for the week. October had tumbled from a $3.410 high Monday to $3.356 Tuesday, $3.250 Wednesday and then reached a low of $3.190 on Thursday under pressure from a bearish 74 Bcf storage injection.

The Energy Information Administration reported that working gas in storage increased to 2,855 Bcf as of Sept. 6, 182 Bcf more than the same time last year and 313 Bcf higher than the five-year average. The 74 Bcf injection compared to last year’s 97 Bcf injection, last week’s 65 Bcf tally and a range of expectations centered on a 65-75 Bcf build. But the injection wasn’t quite large enough to send October through that $3.19 support level.

“The way that we held there yesterday contributed to this [rally Friday], and we were able to kick up past Monday’s high,” said Tim Evans, a futures analyst with IFR Pegasus. “Technically, the market is still in a short to intermediate term uptrend,” he noted.

Evans also said buyers got help from the strength of the petroleum complex because of the Iraqi reaction to President Bush’s speech Thursday. Iraq rejected the return of arms inspections without conditions. “That certainly has us thinking it will come to military action at some point. In the emotion of the moment, traders are buying anything that’s energy or energy-related. That’s part of it,” said Evans.

There also was the effect of Tropical Storm Hanna, which caused about 850 MMcf/d of Gulf gas production to be temporarily curtailed on Friday, according to Destin Pipeline, Texas Eastern and Florida Gas Transmission. “We might lose a little production…but we don’t really need the production right now,” noted one trader, “and it doesn’t seem like this storm will be enough to damage rigs. What we’re really talking about is they might shut in some production for a day or two or cause producers to evacuate personnel as a precaution. At most, I think it would be much less than a few Bcf of shut-in production.”

Despite the apparent eagerness of futures traders to continue pushing prices higher, the longer-term picture, according to Evans, is bearish. “I think that the market will be hard pressed to reach the Aug. 27 high of $3.707. I think it will stall before we reach that, and we are going to recognize that as something of a longer-term ceiling.” Evans said that unless there is further storm action — and there is one tropical wave east of the Windward Islands — there isn’t much left to provide fundamental support. Air conditioning demand is dwindling and the high level of storage is “going to weigh on this market,” he said.

“The major problem here is we still have storage above last year, above the five-year average, and last year’s prices in late September got as low as $1.76. We’ve got double that price now with more storage. That’s the major picture.”

Evans admitted, however, that gas production is down (as much as 5% from last year, according to Lehman Brothers analyst Thomas Driscoll), and the Department of Energy is predicting winter demand to be up 12% because of a return to normal weather.

“But the National Weather Service’s long-term outlook is looking for above normal temperatures across the northern United States, especially in the Upper Midwest,” Evans noted. The National Oceanic and Atmospheric Administration released an El Nino update on Thursday that calls for warmer than normal temperatures across the northern tier of the nation this winter, with no sign of below normal temperatures.

Nevertheless, technical factors appear to be in control of this market. “Getting through $3.47 could take us up into the mid to high $3.50s and the low $3.60s or so” before it caps out, said futures broker Jay Levine of Advest Inc. “Past this — and my belief is $3.90 is next — [it could go] onward to technical counts at $4.25, $4.50 [and] $4.80.”

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