Despite forecasts calling for moderating temperatures both over the weekend and this week, natural gas futures shuffled higher Friday as speculators and options traders covered short positions. The November contract received the biggest boost at Nymex, rising 10.3 cents to $3.041. In doing so, November notched its first $3.00-plus close since Aug. 23.

Several traders surveyed by NGI were surprised by the market’s ability to plod higher Friday. Cash prices, which were down by a nickel or more at locations, offered no support, and the weather forecasts for this week were, if anything, bearish. “From a fundamental perspective, today’s gains do not make much sense,” a trader commented.

Tom Saal of Pioneer Futures in Miami, agreed that Friday’s futures gains were not attributable to any sort of fundamental factor. Instead, he pointed to continued short-covering by funds, banks and other non-commercial entities as the price-supportive factor. “This has been a very constructive month from a technical perspective. The market has rebounded nicely and taken back some of the losses from the long downtrend. Now that we are back above the 40-day moving average, it is probably safe to assume that the non-commercial segment of the market is pretty close to flat.”

According to the latest Commitments of Traders data released Friday by the Commodity Futures Trading Commission, the non-commercial segment of the market had not yet begun to cover their shorts as of last Tuesday. In fact, the speculator community actually increased their short holdings from 16,360 to 18,589 for the week ending Tuesday. However, Saal is not surprised by that figure and believes that after getting burned by covering too fast in the past, non-commercial traders are more cautious in their trading decisions. “Some of them were probably waiting until the market traded above the 40-day for a few days. They probably headed for the exits on Wednesday. That is when we saw the 30-cent run-up. I would bet that they are pretty close to flat now. We will have to wait for next week’s COT report to find out for sure.”

Also of potential impact on Friday, a trader offered, was the expiration of November options. With an open interest of about 7,000, the $3.00 call option garnered a lot of attention Friday. Sellers of that call hoped the market would close below $3.00, allowing the call to expire worthless. When it became apparent that was not going to be the case, they were forced to cover their call position by buying November futures, he said.

Looking ahead to November’s expiration today, Saal would not be surprised to see the market retrace back below $3.00. “We have only seen one really good day of long liquidation and that was Thursday. Ultimately, the question that traders will need to answer on Monday is whether they are willing to be long or short gas for the month of November at the $3.00 mark. Who is willing to make or take delivery at $3.00? As always, that is what decides the direction on expiration day.”

Looking past expiration day, Saal believes the market is entering uncharted territory this year, as storage operators begin to switch from injections to withdrawals. Even at 93% full with more than 3 Bcf in the ground, the level is not without precedent. Storage levels in 1998 reached a peak of 3,127 Bcf. What is unprecedented, he argued, is the cost of gas in storage.

“This year is like no other year in that the average price of gas in the ground is $3.50 or higher, well above the $2.25 historical average. That is going to impact greatly the decision-making process of storage players, especially in November. Do they buy $3.00 physical gas and hold off withdrawing $3.50 gas? By doing that, they will keep the cash market from falling during the first couple weeks of November. At the same time, that will give them plenty of gas to meet loads down the road, which could end up crushing prices later. It will be interesting to see how this all plays out,” Saal said.

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