Heading into Friday’s trading session, there were about an equal number of market-watchers calling for a short-covering rally as were calling for a continued sell-down. As it turns out, they were both right.

Pressured by bearish weather reports, natural gas futures funneled lower Friday morning as traders continued to liquidate contracts. However, the $3.80 level had denied prices access to the $3.70s on two previous thrusts earlier in the week and it held again Friday morning, allowing bears only a Pyrrhic victory to $3.795. Short-covering ensued and the December contract rebounded throughout the rest of the session. It closed at $3.903, up 7.2 cents for the session, but down 15.7 cents for the week.

Few sources polled by NGI were surprised by the strength of Friday’s rebound, citing oversold conditions and uncertainty over weather forecasts for later this week. Although forecasts on Friday continued to point to mild weather, there is the fear that those forecasts will change over the weekend, prompting a bullish surprise for traders Monday morning.

However, a quick look at recent history will show that the market is just as prone to moving lower as it is to moving higher on Monday. Interspersed with gains of 15 cents on Oct. 14 and 28, the prompt contract has fallen to the tune of 8 and 20 cents on Oct. 21 and Nov. 4 respectively.

Another factor viewed to be supportive Friday was the uptick in the nearby crude oil pit. After plumbing to a new four-month low at $25.16/bbl, the December crude oil futures contract rallied on the news of the unanimous approval of a tough new Iraq resolution by the United Nations Security Council, which calls for “serious consequences” should Iraq fail to comply with disarmament of its weapons of mass destruction. December crude finished at $25.78, up 40 cents for the session and more than 60 cents off its low for the day.

“It’s more of a case of synchronicity than anything else,” said Ed Kennedy of Commercial Brokerage Corp. in Miami when asked about the behavior between crude oil and natural gas futures Friday. “More than anything, [natural gas futures] continue to be a weather-driven market. Storage is a known factor. We know how much gas we have in the ground. The wild card is the weather and I expect prices to continue to react to each updated forecast,” he reasoned.

Another factor that deserves mention is that physical traders were seen picking up additional supplies for storage injections when cash prices dipped into the the $3.70s Friday. And while it is possible they were looking to take advantage of favorable cash to futures forward-carry spreads, it also is possible that prices in the $3.70s represent good value. If the latter is true, Kennedy would not be surprised if the futures market has a difficult time punching down through support at $3.80. “We had lows of $3.80, $3.80 and $3.795 [last week]. Clearly the market has uncovered a layer of support.”

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