October futures values plunged on Wednesday as the newly minted front-month contract continued to approach the lows for the down move carved out by the preceding month. The October contract ended up closing Wednesday’s regular session at $2.715, down 10.6 cents from Tuesday’s finish.

The October contract pushed lower for much of the day’s session, recording a low of $2.709, just 1.7 cents off the $2.692 low for the move created by the September contract on its Aug. 27 expiration.

“It really does not surprise me at all that the October contract is moving down to test support that the September contract failed to get through,” said Steve Blair, a broker with Rafferty Technical Research in New York. “There is major support area between $2.500 and $2.750 based on the slightly upsloping trendline recorded back in 1992.”

What Blair is surprised by is a couple of spread disconnects at a peculiar time of the season. “I’m not sure why there is a huge disconnect between cash prices and the screen. When the market was trading around $2.80 on Wednesday, next-day Henry Hub prices were trading as low as $2.22, so at one point there was nearly a 60-cent gap, which is surprising given the time of year. Something has to give, especially because the gap is so large,” he said. “The other surprising spread is the October-November spread. It widened out to $1.16 to $1.17 on Wednesday, but the question is why is this spread going further and further into contango when the October contract is going to expire at the end of September. From a fundamental perspective, I don’t understand why that gap is increasing. Is somebody’s crystal ball telling them a major hurricane is going to hit the Gulf of Mexico in late September?”

Top traders see a major storm as necessary if funds and managed accounts are going to cover their large short positions. “As prices have accelerated to the downside during the past two to three weeks, the large speculators that we usually refer to as the funds have added appreciably to a net short holding. We feel that this short position was boosted further in the latest reporting period ended [Tuesday] given the approximate 47-cent price decline of the past week,” said Jim Ritterbusch of Ritterbusch and Associates. He observed that the funds are “apparently comfortable in maintaining a huge short position even at sub-$3 levels; it is becoming increasingly apparent that a major storm event will be required to force a significant bout of short-covering.”

Currently, there are no major storms on the horizon, according to AccuWeather.com. Tropical Storm Erika is poorly organized and looks to be on an East Coast course rather than a Gulf of Mexico path, although it is still early, forecasters say.

“As far as tropical storms go, Erika is looking pretty anemic right now, and there is little concern this will turn into a big storm through the Labor Day weekend,” said John Kocet, a meteorologist with AccuWeather.com. “It seems that there is a lot of dry air invading the western flank of the storm now, and once it gets by that, it will have to deal with a zone of wind shear.”

Looking at the current storage situation, it appears most industry observers are expecting a build for the week ending Aug. 28 somewhere in the 55 Bcf to 65 Bcf range. Bentek Energy’s flow model indicated an injection of 56 Bcf, which would bring stocks 10.4% above the five-year high and 17.4% above the five-year average.

“If injections for the remainder of the season track along the five-year average, stocks will end the season just over 3.9 Tcf,” the research firm pointed out in its weekly storage note. “EIA released their annual estimated peak working gas storage capacity report indicating [a] peak capacity increase by 100 Bcf from a year ago, and design capacity increased by 177 Bcf; bringing estimated peak capacity to 3,889 Bcf and design capacity to 4,313 Bcf” (see Daily GPI, Sept. 2).

The number revealed Thursday morning will be compared to last year’s 92 Bcf build for the week and a five-year average injection of 64 Bcf.

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