October natural gas futures went off the board on Monday with a bearish bang as values dropped under the weight of the recent advance. October slid 25.5 cents on the day to terminate at $3.730, while the November contract wasn’t nearly as weak in trimming 11.8 cents during the regular session to $4.830.

October natural gas was headed lower well before the regular session’s opening bell, which led Citi Futures Perspective analyst Tim Evans to conclude that the “time pressure” of the expiring contract might have been the “primary factor” behind the early price decline.

“Weather influences seem mixed, with the cool temperatures forecast for early October across the northern U.S. bringing some early heating demand into the equation, but the seasonal hurricane risk [is] fading,” he said.

With November futures now in the spotlight, Evans thinks the contract will likely do most of the heavy lifting to get closer to cash market values. The Henry Hub cash average on Friday finished around $3.540, well over a dollar below the November futures price. “While the cash market could certainly leap to levels closer to the November valuation over the course of the next month, we note that it will need to do so with record storage on hand,” Evans said. “That’s not necessarily an impossible task, but we see risk for November down to the $3.500-4 zone if the convergence occurs closer to where the cash market is now.”

The Commodity Futures Trading Commission’s Commitments of Traders (COT) report released after the close of trading Friday showed a large reduction in the number of contracts held by managed money — the component of the market perhaps the least likely to concern itself with market fundamentals and known for its use of strictly technical and quantitative trading based solely on price movements and indicators derived from price movements. As of Sept. 22, managed money accounts reduced their short exposure to futures contracts by 15,898, or 8.2% of previously held short contracts. When futures and options are factored in, the figure jumps to a reduction of 28,324 contracts, or 15.9%.

Analysts looking at the figures saw a big change in speculative holdings. “That looks like heavy short-covering, and there was heavy covering by large speculators, who had been selling quotes lower as the market hit $2.409,” said a prominent East Coast energy consultant. He queried why “they were not covering more or earlier. The trade was liquidating longs into the market strength. Traders got out of spreads.”

Evans said the COT report revealed that the flow of buying supported the rally in prices last week, but the breakdown of the data also confirmed that the advance was based on a lot of short-covering. “Overall, we don’t see the market composition as sufficiently skewed for us to assign a high probability to any particular price scenario going forward,” he said.

Weather bulls may get some help if forecasts are correct. MDAEarthsat said the six- to 10-day time frame will be dominated by cooler-than-normal conditions across the majority of the United States. An upper trough of low pressure will cool the Midwest early before weakening as it pushes eastward. “A reinforcing cool shot will enter the West early to mid-period, spreading widespread below- and much-below-normal temps through the region — models are in good agreement on the arrival of this trough,” the forecasting service said Monday morning.

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