October natural gas tacked on another healthy gain Wednesday and settled above $4 as traders noted considerable angst among holders of short positions feeling that they did not want to get caught on the wrong side of any market move higher. At the close October had risen 5.9 cents to $4.039 and November had gained 6.3 cents to $4.117. October crude oil dropped for the day by $1.30 to $88.91/bbl.

“Traders are switching out of a bearish summer mode to a bullish winter mind set,” said Eric Bentley, CEO of VKNG Energy of New York. To some the particular modality didn’t matter, for it was all about price and the need to cover existing short positions.

“Open interest declined by 24,000 contracts, and that’s a signal that the black-box algorithmic traders have switched from bearish to either flat or bullish. Volume was high, about 120,000 contracts in October and both the October-November and October-December spreads narrowed,” he said.

“Today it was a case of who was going to blink first, but a lot of stops went off above $4. Once the market got to $4.06 it was a straight shot to $4.10. Value is probably about $3.90 to $3.95, but today it was all about minimizing losses and getting on the right side of the market,” said Bentley.

Traders will be jockeying for position to get on the right side of the market when the Energy Information Administration (EIA) releases inventory data at 10:30 a.m. EDT Thursday. In many cases the spot futures contract will carve out both the high and low price for the session in the moments following the release of the figures.

The range for the week ended Sept. 6 is wide since demand was tempered by the Labor Day holiday, but supply was impacted by about 10 Bcf due to shut-ins prompted by Tropical Storm Lee. Last year 96 Bcf was injected and the five-year average stands at 79 Bcf. Kyle Cooper of IAF Advisors in Houston expects a build of 82 Bcf and a Reuters poll of 22 analysts revealed a sample mean of 85 Bcf with a range from 76 Bcf to 100 Bcf. Tim Evans of Citi Futures Perspective is looking for an increase of 94 Bcf, but concedes that “there are also some estimates a step lower than [his estimate] in the neighborhood of 85 Bcf, closer to the 79 Bcf five-year average level.”

“Confidence regarding Thursday’s report may also be lower than normal, because we had both the Labor Day holiday as a possible reduction to the demand side of the market, as well as Tropical Storm Lee which trimmed production form the Gulf of Mexico by perhaps 10 Bcf,” Evans said in a note to clients.

One school of thought had Tuesday’s 9.5 cent gain in the October contract relegated largely to weather developments. “Natural gas futures recovered further from its latest downside test on Tuesday, helped to the upside by a Midwest cold snap that’s going to drop temperatures into the upper 30s in places like Minneapolis and into the 40s across a broader area a little farther south over the next few days,” said Evans.

A broad consensus seems to be lacking regarding omnipresent cooling across the Midwest. Weather forecasters are calling for warmth in the western U.S. with a cooler outlook in the more deferred time frames in the East.

“[Wednesday’s] forecast inched hotter for the West both next week and for the 11-15 day as the latest model guidance shows more support for hot ridging toward the West Coast,” said Matt Rogers, president of Commodity Weather Group in the firm’s Wednesday morning six- to 10-day forecast. “This could mean more chances for coastal heat spikes but a higher probability of moderate to much-above-normal temperatures in the interior West. Texas rain chances are still seen early to middle [of] next week with the European model offering over an inch of rain to the Houston area. Temperature trends are shifting cooler for the eastern U.S. in the second half of the 11-15 with another potentially stronger cool shot lurking.”

One analyst doesn’t see Tuesday’s gains as having any long-lasting weather component.

“[W]e are not viewing this item as a major supportive force, and we will continue to feel that cool temps will be negated by some continued warm patterns across Texas and southwest regions,” said Jim Ritterbusch of Ritterbusch and Associates. According to Ritterbusch, market treks much beyond $4 could be a stretch.

“We continue to see a market that is still having difficulty straying far from the pivotal $4 mark given a current balance between supply and usage and the domestic nature of the natural gas market that is keeping the trade immune to international developments such as the euro zone debt issues,” he said in a Wednesday morning note. “While the temperature factor tends to diminish at about this time of the year, tropical storm activity into the GOM [Gulf of Mexico] region is usually capable of cranking up price volatility. However, this year’s storms have generally been veering away from the GOM and as a result, only a modest amount of production has been impacted thus far by storm activity.”

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