As expected, the natural gas futures market experienced another high-volatility trading session Friday as traders kept an eye on Hurricane Isabel. Prices dove lower during the first hour of trading only to rebound convincingly in the afternoon as traders were reticent to be short heading into the weekend. October finished at $4.766, up 2.8 cents for the day, and down only a scant half-cent for the week.

Natural gas futures gyrated wildly for much of last week on each new update out of the National Hurricane Center and private forecasters. Futures received a boost on Wednesday when Isabel was given a nearly 50% chance of reaching the Gulf of Mexico. Then on Thursday the market dropped 23 cents when forecasters backed that likelihood back down to closer to 30%. “Isabel appears to have little chance of entering the Gulf of Mexico, but there is always a possibility,” said Kyle Cooper of Citigroup Friday.

However, traders acknowledge that if the storm is able to find its way into the Gulf of Mexico, the price increase will be measured in dollars, not cents. With her Category 5 intensity and 160 mph sustained winds, Isabel has few peers. In fact, you need to go back to August of 1992 and Hurricane Andrew to find a storm of that magnitude that made it into the Gulf of Mexico (after cutting a swath across the Florida peninsula). Though gas prices were much lower then, the impact on the price level in percentage terms was considerable, with futures rising in September of that year more than 50% over pre-Andrew levels (read NGI‘s Archive of Hurricane Andrew). The storm knocked out nearly 20% or 2.75 Bcf/d of Gulf Coast production for an extended period late in 1992.

By comparison, Hurricanes Isidore and Lili, which achieved Category 3 and 4 intensity respectively (sustained winds of 111-155 mph), knocked a total of 90 Bcf off the market during a four-week period last October. Because there was less long-term damage to production assets with Isidore and Lili, however, the price impact was smaller. Prices last October climbed only about 25% over pre-storm levels.

More than anything, Isabel’s threat last week obscured a rather bearish storage report released Thursday. According to the EIA, working gas levels rose 97 Bcf to 2,486 Bcf. The injection was seen as slightly bearish versus the majority of expectations in the 85-95 Bcf range. It was undeniably bearish versus last year’s 74 Bcf build, the five-year average of 68 Bcf and the previous week’s 70 Bcf report. Looking ahead to this Thursday’s report, Cooper calls for a build near 90 Bcf, which will dwarf last year’s 69 Bcf injection and the five-year average of 76 Bcf. For storage to reach the 3,000 Bcf level by Nov. 1, storage must average 64 Bcf a week.

Though technicals are of diminished importance in what is shaping up to be a week rich in fundamental market information, it is worth mentioning that a break below $4.60 would turn many chartists bearish. Specifically, technicians are tracking an uptrend line drawn off lows in January of 2002, August of 2002 and the more recent bottom at $4.55. A break below this area of support could lead to a sell-off down to the $4.00 level, sources agree.

On the upside, resistance is seen at the psychologically important $5.00 mark.

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