Natural gas bulls couldn’t catch a break Tuesday, even with the release of favorable economic data showing that the economy is now in an expansion phase. October futures fell 15.6 cents to $2.821 and November shed 13 cents to $3.868. The market had a hard time bucking the headwind from the equity and crude markets as the Dow Jones Industrial Average dropped 185 points to 9,310 on a weak bank sector and October crude oil fell $1.91 to $68.05/bbl.

“Natural gas is just following the pattern of the last two months. The noncommercial short position continues to be very large, and the cash market is falling precipitously,” said Julio Sera, a trader with Hencorp Becstone Futures in Miami.

He added that at the Henry Hub cash prices were trading in the $2.29-2.45 range and futures prices were following. “All the macro factors such as declining production and a lower rig count at some point should take effect, but it is anyone’s guess as to the timing. Until the noncommercials start to lift their short positions, it’s a guess” as to when prices might rise.

He added that there was really no discernible bottom to prices until these factors were balanced. “Look at the October-November spread at $1.04. That’s the cost of storage, and at the other side we are theoretically approaching the upper end of [physical] storage capacity. That spread should widen.”

Natural gas bulls got some support in the form of improved economic numbers. The 10 a.m. EDT release of the August Institute of Supply Management Manufacturing Index came in at a healthy 52.9 reading. The July index jumped 4.1 points to 48.9, and a Bloomberg survey estimated earlier that it might increase to 50.5 for August. The index is constructed such that any reading over 50 indicates economic expansion, and Tuesday’s report was welcome news to those looking for an end to the recession.

It was too early to make a good call on its potential production threat, but the National Hurricane Center (NHC) said a low-pressure area about 260 miles east of Leeward Islands early Tuesday afternoon “could be developing a well defined surface center.” Late in the afternoon NHC said the system had been upgraded to Tropical Storm Erika. The agency couldn’t tell at that point whether the system might reach the Gulf of Mexico or do a Bill/Danny-style trek up the East Coast, although the latter was indicated in the early projected tracking.

Top traders see no immediate sign that the bear market for natural gas is about to change soon. “On a longer-term basis since topping out last July just under $14, the spot gas market has been down 13 out of 14 months. The natural gas bear market has been one of the most relentless bear markets we have ever seen,” said Mike DeVooght, president of DEVO Capital. He added that fundamentally, market dynamics haven’t changed. “Storage is high, production is more than adequate and demand is flat because of a stagnant U.S. economy. To break this bear market we will most likely need either a real pick-up in demand or a production decline.”

DeVooght advises clients to hold on to current positions. End-users and trading accounts are advised to stand aside, and producers and those exposed to price weakness are advised to hold an Oct. $4.50-6.00 collar as well as a 12-month $5-8 collar for 35 cents.

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