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NatGas Bulls Savoring Thursday's Gains; July Called Unchanged

July natural gas is expected to open flat Friday morning at $3.05 as weather forecasts remain supportive and market technicians get a new lease on life with Thursday's settle well above $3. Overnight oil markets rose.

Weather models overnight maintained the overall pattern of above-normal temperatures but with a high degree of uncertainty. "[Friday's] 6-10 day period forecast is generally warmer than yesterday's forecast over the south-central and eastern US, as well as the West Coast," said WSI Corp. in its morning report to clients. "The Interior West, Rockies and Plains are cooler. CONUS PWCDDs are up 0.6 to 56.3, which are 12.8 above average.

"Given the inconsistency and inherent uncertainty with tropical activity, the forecast has risks in either direction. The northern half of the CONUS has generally cooler risks, while the southern states have minor warmer potential."

Thursday's surge above $3 may be a shot across the bow by the bulls. Analysts longer term see the market vulnerable to the upside.

"Underlying fundamentals remain tight with core summer exposed to upside price risk, and core winter 17/18 highly exposed in anything other than a mild winter scenario," said Breanne Dougherty, analyst with Societe Generale in New York in a report.

"[The] market is seemingly attempting to incentivize production growth with short - term price upside. With Mid/Small - caps now the dominant US producers, SG sees production base as only marginally influenced by 2017 prices; near - term growth should hinge on 18/19 contract prices, which are predominantly below $3/MMBtu.

She added that Societe Generale is much more positive on the market's post 1Q2018 price view, reflecting the thesis that the market will struggle to bounce back after extended fundamental tightening. Year-on-year demand growth, residential/commercial, Mexico exports, LNG exports - requires strong production growth to restore equilibrium to the market in 2018.

"SG's near - term price view, and risk bias, does not reflect a cost of supply methodology. While cost of supply is an appropriate consideration when assessing long - term equilibrium price for the market, and is reflected in the post - 2018 price outlook, SG does not see it as an appropriate measure when assessing near-term price behavior/risk given the extreme vulnerability of the market to weather, the limited elasticity within the market during peak demand periods, the supply skew created by hedging programs, and the lag between price signals and volume response from the now predominantly shale derived production base.

"Production growth revival, and stability, hinges heavily on the messages being provided by the NYMEX curve going forward. The unlikelihood of a perfectly complemented supply/demand growth profile in the near term gives rise to near - term tightening, but also to backwardation and loose balances in 2019/2020."

In overnight Globex trading July crude oil rose 34 cents to $44.80/bbl and July RBOB gasoline gained 2 cents to $1.4568/gallon.

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