Just a hint that Hurricane Felix might be able to reach the Gulf of Mexico was enough to send October natural gas futures into the “plus” column Tuesday. After opening in a deep hole, down almost 12 cents from Friday’s settlement, October futures managed to rally a stout 27.9 cents to finish at $5.629, up $16.1 cents for the day.

The hint came in the form of an isolated weather forecast, or computer model run, that showed Felix cutting across the Yucatan Peninsula, heading north into the Bay of Campeche and reaching the southwest Gulf of Mexico. “Traders ran the market up because one very unpredictable hurricane model suggested that Hurricane Felix would end up in the southwest Gulf of Mexico, but that is wrong,” said a Houston broker.

AccuWeather has numerous hurricane forecasts to analyze and follows several hurricane tracking models. One of the paths in its arsenal of models shows an isolated storm track for Felix into the Bay of Campeche heading north into the southwest Gulf of Mexico.

Most forecasters do not agree. The National Hurricane Center (NHC) at 2 p.m. EDT reported Hurricane Felix grinding west over northeast Nicaragua at 14 mph with sustained winds of 100 mph. The NHC predicted that Felix will follow a westerly course across Central America. AccuWeather’s own consensus forecast, prepared by combining numerous computer model runs, shows diminishing winds as it trudges across Central America. “From this point on, the storm will be remembered more for the excessive amount of rain it brings to Honduras, El Salvador and Guatemala. Where all that tropical moisture is dragged upward by the terrain, rainfall amounts will probably exceed one foot. The torrential rainfall is already causing serious flooding and mudslides,” said AccuWeather’s John Kocet.

“The fundamentals of the market are still pretty negative and it looks like traders were able to rally the market on a little bit of hurricane hype. This rally would be a good place to reestablish short positions,” the Houston broker said.

Many traders are comparing the present decline in natural gas futures to last year’s decline, which sent spot futures as low as $4.05 in late September 2006. He added that the down move of 2006 was exacerbated by less storage capacity than present and Amaranth liquidation. “There are two factors which are not as bearish as 2006, but overall the supply-demand [situation] looks negative. I think a $4 handle is possible,” he said.

Other traders remain unimpressed as well. “Notwithstanding today’s strong 6-7% recovery off of the overnight lows, we remain unimpressed with the price action and would not exclude the possibility of a decline to the $5.19 level within the coming week,” said Jim Ritterbusch of Ritterbusch and Associates. He noted that a diminished storm premium was the main driver behind the early price weakness while some fund profit taking and bullish spillover from the oil complex accommodated the late gains. October crude oil gained a stout $1.04 to finish at $75.08/bbl.

Risk managers are maintaining a modest short position for producer clients. Mike DeVooght of DEVO Capital is holding on to his previous winter futures position. “We are tempted to take our profits on these positions because we feel the gas market is ripe for a nice rally. But prudence tells us to stay with the trend and that is still lower at this time. Therefore we will stay lightly short and if a nice rally occurs, we will add to our short winter positions,” he said in a note to clients. DeVooght currently recommends that producers hold short a winter 2007-2008 strip established earlier at $9.00 for 15% of production.

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