If the observations of a long time student of the natural gas market are correct, the short-term outlook for natural gas prices shows further room for decline while the longer term picture looks much more bullish primarily because of a lukewarm response from the producing sector.

“The drilling rig count was up slightly this week, but mostly in Canada,” noted Jerry Brown, a Tampa consultant. “My view is that the fundamental factors are negative for natural gas prices. If you superimpose a war and crude oil is at $35, natural gas would be justified at $3.20 to $3.50 per MMBtu, but I don’t see any fundamental justification for these elevated prices given current conditions,” he said.

“The producers have had a pretty good year. Prices started the year low, have risen, and if they had any oil associated with their gas production, they are doing well. I don’t see anyone shedding tears for them.

“From a technical perspective there is an ‘island’ around $2.83 to $2.86, and numerous traders are saying the bottom is in and they will be buying support — never mind the fundamentals. But if you take those traders out of the market, prices could take a dive.”

Everyone is nervous about the longer term aspects of the market, he noted. “Crude oil is keeping the market really agitated. It’s a tough market to call right now. For the bears the best thing to do is sit on the sidelines and wait for a confirmation below $2.86, and if that happens I think there is a lot of room for prices to fall further. [In] the 40-plus cents between current levels and $2.86, there is a great amount of buying interest,” said Brown.

Military conflict is on many traders’ minds, noted a New York commodity trading advisor. “I don’t think the bottom of the natural gas market will fall out anytime soon,” he said. “I think the market is well supported, and the economic numbers aren’t so bad.

“The market is also getting help from the war mongering talk over Iraq. Bush’s statements on Wednesday of last week were the strongest yet… He can’t back out now and he has really committed himself… I’m just assuming that there is something to that and that there is very little downside [to energy markets] right now.”

The risk is for the physical market shorts for the upcoming heating season, he said. “We’ve been hearing about the oversupply since last Sept. 11, when the market reopened after the disaster. The market has not seen prices that low since, and higher values are slowly being developed. It seems to me that the market is pulling a little Houdini and slowly going up. People aren’t paying attention. Everyone has been bearish for so long.

“The supply demand balance is such that even moderate weakness in crude oil would not impact natural gas that much. The supply dynamic that gets the most attention is the storage issue, but behind that there’s the production issue that continues to worsen. One cold winter, a storm or a war will make that the front issue. The odds are tremendously skewed for the longs.” (Republished with permission from Bill Burson, https://gastrader.net )

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