With Tropical Storm Ernesto still holding a north-northwesterly track, the expiring September natural gas futures contract explored lower price levels for a majority of Tuesday before a late short-covering rally pushed values higher. September natural gas ended up expiring at $6.816, up 34.4 cents, while October natural gas finished the day 6.4 cents higher at $6.876.

Following Monday’s significant 68.5-cent drop on news that Ernesto apparently would spare the Gulf of Mexico, some traders had been expecting a little corrective action Tuesday. After reaching a $6.080 low a handful of times in morning trade, September natural gas pressed higher. Traders were also wary of expiration-day trading, which can often be a little squirrely.

“We got down there very near $6, which is close to some really good support numbers,” said Steve Blair, a broker with Rafferty Technical Research in New York. “The fact that it was the September contract’s expiration really exacerbated the whole situation. Right around 1:45 p.m. EDT, the market saw a little short-covering rally of 15-20 cents. As soon as the bell rang to start the 30-minute closing range of the expiring contract, September took off. Word on the floor was there was a tremendous amount of MOC [market-on-close] buying and no sellers. When they finally held the post-close a little after 3 p.m., the September contract came off a lot, which of course doesn’t count toward the settlement of the market. It appears there were some longs still out there that had to square up some positions at the end.”

Looking at the market’s reaction to Ernesto over the past couple of sessions, Blair said he was “a little surprised that the market sold off on Friday ahead of the weekend when it didn’t know the path that Ernesto was going to take. We came off even more on Monday when Ernesto turned north, and then Tuesday’s action was all about expiration. There is no other explanation for the late-day move Tuesday.”

Looking at the October contract, Blair said the tropics hold the key for the next couple of months. “I think this market is going to be primarily about the upcoming storm activity,” he said. “With October closing Tuesday at $6.876, the contract is firmly within that $6.50 to $7.50 comfort zone of the last few months. Strong support still resides down near $6.”

Top traders had suggested that the price decline of Friday and Monday might have been too much of a good thing for the bears. “Just as the market over-discounted the threat of Ernesto on the upside, it is in the process of extracting too much storm premium on the downside,” said Jim Ritterbusch of Ritterbusch and Associates, prior to trading Tuesday. He said that as a result, the next threatening tropical depression will likely force a sizable price rally back to within the $7.00 to $8.00 range.

Ritterbusch also correctly predicted that Monday’s low in the September contract of $6.32 would set an ominous tone. “[Monday’s] breakdown in nearby natural gas values to below expected support in the $6.40 to $6.50 zone basis September sets the stage for further declines in our opinion. [Tuesday’s] lows in the September contract will provide an easy downside target to the October futures.” If Ritterbusch’s theory holds true, October natural gas could be visiting $6.08 pretty soon.

Temperature conditions are not supportive of higher prices. AccuWeather reports that for both New York and Chicago, next week’s highs around 78 degrees lag seasonal normal highs of 80.

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