Maintaining Thursday’s momentum, October natural gas futures punched below the psychological $6 level in overnight trading and remained there through the course of Friday’s holiday-shortened session. The prompt month put in a low of $5.820 during the quiet session before settling the week at 1 p.m. EDT at $5.877, down 17.1 cents on the day and $1.467 lower than the previous Friday’s close. The week also saw the September contract go off of the board at $6.816.

“The market was pretty dead all day. Word on the floor was that there were some absences ahead of the long holiday weekend,” said Steve Blair, a broker with Rafferty Technical Research in New York. “It doesn’t really surprise me that there weren’t any significant moves on the day. The session was basically worthless.”

Commenting on the sub-$6 trading session, Blair said, “It looks like we are working on getting back down into the $5.70s to test out that area once again. The last couple of times we have dropped below $6, that is exactly what we did. The failure of Ernesto to get into the Gulf of Mexico really took a lot of the steam out of the market. We are already at Sept. 1 and some respected forecasters are once again downgrading their hurricane forecasts.”

Colorado State University forecasters William Gray and Philip Klotzbach slashed their expectations for the 2006 season for a second time in a month. In the downgrade, the team said they now expect there to be fewer hurricanes in the Atlantic than during a normal season (see related story).

“While it only takes one good hurricane to do some significant damage, we had so many in a row last year it created an incredibly inflated price level by the time Katrina and Rita hit. It was a much different scenario last year,” Blair said. “Now, even if we get a major hurricane in the Gulf this year I don’t think we’ll get back up to $13-14…not unless it ends up being the mother of all hurricanes.”

Looking at the futures market in the near term, Blair said he thinks the market will likely hold the $5.70 to $5.75 level once again, spurring a technical bounce. “I think we have a market right now searching for direction from storage or weather…and right now it is not getting any help from either,” he said.

Top analysts are wrestling with the normal seasonal pattern of natural gas prices with a very negative short-term outlook. “With Thursday’s decisive close below the key $6.080 (support) level, the only thing we have left in the bullish column is the tradition of summer to winter rallies,” said Walter Zimmerman of United Energy. He noted that natural gas typically rallies sharply from early August into late November. Hence, the very dramatic rallies in natural gas over three of the last five years. “In natural gas September is typically a rally month,” he said.

Offsetting the strong seasonal pattern is the implication that Thursday’s decline and weak close will set up a retest of the early July low at the $5.390 level. Zimmerman added that $5.390 is a 0.707 retracement of the entire $1.020 (1991) to $15.780 (2005) advance at the $5.345 level. A decisive break below that targets a test of the 0.7862 retracement down at the $4.175 area. “The monthly candlestick is an exceedingly bearish engulfing pattern. Every time the monthly candlestick has been this bearish in natgas the result was several more months of weakness.”

A bearish engulfing pattern is part of the lexicon of candlestick analysis. Candlesticks give information on the opening price and also the trend of prices within each trading period. If the closing price is above the open, the candlestick is open, or white, indicating a bullish trend, but if the close is below the open, the candlestick is black, or bearish. The body of the bearish August candlestick is wider than that of July and thus is engulfing July.

If an unfavorable technical picture were not enough, weather conditions in a broad expanse of the Midwest extending from the central plains to the Ohio Valley will offer little help to weather bulls. AccuWeather reports that much of the Midwest and western Great Lakes will experience fair weather conditions and comfortable temperatures. In addition, Tropical Storm Ernesto cooled much of the Mid-Atlantic Friday. The ultimate impact from Ernesto may be the elimination of any temperature-derived cooling demand for natural gas and power.

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