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Cash, Futures Keeps Drifting Higher on Lack of Bearish Fundamentals

The unexpected happened again on Tuesday when natural gas cash and futures prices defied the slightly cooler weather trend, the overbought conditions on Nymex, the absence of a threatening hurricane and the lofty height of price levels -- and proceeded to continue climbing.

Cash points averaged 10-20 cent gains with a few even higher jumps in the Northeast and Gulf Coast regions and some smaller gains in the West. Cash prices are now $1.75-$2.25 higher than first-of-the-month index levels. Meanwhile, September futures added 21.2 cents Tuesday to end the day at $9.752.

"I was a little surprised by the market strength, but it just seems right now if the market doesn't have anything to direct it, it will just drift up higher because there is just so much bullishness out there as far as sentiment is concerned," said a Gulf Coast marketer. "The weather isn't really breaking that much and there isn't any other bearish news out there.

"But I think if we drift up again another 10 cents on Wednesday, we may see this thing pull off pretty hard even on bullish news on Thursday. If the storage number isn't very small, but is more in line just with what people are expecting, prices could back off as everybody takes profits," he said.

A New England marketer said his group also was caught off guard by the run-up Tuesday because high temperatures in the region were down about 25 degrees from weekend highs and about 10 degrees from Monday's highs. "The power gen crowd was mostly selling today and certainly not buying, but there were still many buyers to be found. We rallied despite the cooler weather and that kind of surprised us."

He speculated that the last two weeks of sustained heat left some shippers out of balance on transport. "A lot of the balancing crowd was short on the pipe and that's keeping demand strong. They have to give back to the pipe before the month ends. I think that's where most of the strength came from today."

New England posted a strong 70-cent basis again, he said. "Algonquin was trading around the high $10.40s and Tennessee Zone 6 was in the mid $10.40s. We really rallied. It was strong all day. I couldn't believe it. I was hitting the bids early thinking it would fall off, but we rallied from there.

"I don't think this can sustain itself," he added. "Prices will move off of Nymex, but I think basis has to come in here. I would expect something closer to 50 cents for that."

A Midwest source said Chicago cash prices rallied nearly all day. "The first trade was the lowest trade that I saw," he said, noting prices there got as high as about $9.60. Chicago prices averaged in the high $9.30s for a daily gain of 12 cents.

In the West, the increases were smaller, with Rockies and California points up a few cents, San Juan up a nickle and West Texas locations up about 15 cents. Midcontinent gains were 10-15 cents.

Meanwhile, temperatures in the Southwest, Southern California, southern Rockies and parts of the Midcontinent remained about 10 degrees below normal. The Southeast held slightly above normal with highs in the mid 90s. Temperatures on average aren't expected to change drastically for the rest of the week.

The next big fundamental news will come from the storage report on Thursday. Tim Evans of Thomson Financial said he's expecting the Energy Information Administration to report an injection between 40 and 50 Bcf for the week ending Aug. 12. While Ron Denhardt of Strategic Energy & Economic Research is projecting a 52 Bcf injection. Last week's report showed a 43 Bcf injection and last year during the week ending Aug. 13, EIA reported an injection of 78 Bcf.

Nevertheless, Evans and Denhardt are making different predictions about where prices are headed. Evans believes natural gas is vulnerable to a major correction although he realizes it may take time for the market to reach that conclusion. In contrast, Denhardt expects oil to hit $70/bbl relatively soon, taking natural gas with it.

"The weather has been extremely bullish. Population-weighted cooling degree days have averaged 17% warmer than normal from June through Aug. 20. Expectations of well above average hurricane activity and high oil prices are likely to keep gas prices high the remainder of the non-heating season," Denhardt said in a note to clients on Tuesday.

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