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Futures Penetrate $8 Again on Storm Fears, But Unable to Hold Higher Ground

After breaking above the psychological $8 level for the fourth consecutive day, August natural gas futures on Friday followed the path laid out the three previous days. It sold off.

After reaching an $8.08 high earlier on Friday, the prompt month trudged lower for the remainder of the session, finally settling at $7.849, just half a penny higher on the day, but 37.7 cents above the previous Friday's close.

Crude and heating oil futures took it easy on Friday. August crude settled 29 cents higher at $58.09/bbl, while August heating oil finished up less than a cent higher at $1.6621/gallon.

Traders on Friday were still digesting the bullish mix of a relatively positive market response to bearish inventory data, hot weather and a menacing hurricane in Emily.

"I think the only reason these markets are up at these levels is due to the storms," said Steve Blair of Rafferty Technical Research in New York. "There's really no other reason for them to be up here."

Blair noted that a lot of the flip-flop in natural gas futures can be attributed to the ever-changing path of Hurricane Emily. "When the storm was first announced, people were concerned there would be more shut-ins, so the price went up. When the National Hurricane Center revised Emily's path on Wednesday to a more southern route, there was a little sigh of relief. Now that it appears the storm might be taking the same route as Tropical Storm Cindy and Hurricane Dennis, people are on guard again."

Just when some producers were getting their hopes up about Emily's route, the National Hurricane Center (NHC) changed its projections for landfall to near Brownsville, TX (see related story). The center expects the storm to hit Wednesday morning (July 20). Producers could spend a third week in a row evacuating offshore personnel and possibly shutting in some production in the vicinity of the hurricane. The only good news on the fickle storm was the fact that it had dropped from a Category Four to a Category Two hurricane by late Friday.

"This market is so sensitive to the supply side, it just reacts," Blair said. "This $8 level is definitely going to be tough to maintain unless we have a production disruption."

Traders were impressed Thursday with the modest retreat in the natural gas futures as decidedly bearish storage inventory statistics failed to have the anticipated impact. "The local traders sold right out of the box when they saw the injection number," said a New York floor trader. He admitted he thought that prices would fall past the $7.66 low, but trade and commercial buying emerged between $7.68 and $7.70 and prices rallied. "In spite of the fact that the locals and short-term traders sold Thursday on the [storage] number, they still want to play it from the long side," he noted. August futures settled Thursday at $7.844, down $0.056.

The Energy Information Administration reported injections of 94 Bcf for the week ended July 8, well ahead of trader expectations of an 85.4 Bcf injection. The 85.4 Bcf was the consensus of the ICAP options auction held on Wednesday.

Continued hot weather fuels bullish market sentiment. AccuWeather had forecasted a high of 86 this past Friday for Chicago, with an increase to 90 by Saturday and 94 on Sunday. In Philadelphia the high of 87 Friday was forecast to reach 91 by Sunday and 93 on Monday.

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