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Market Realigning, Traders Say; July Gains

July futures rose Friday as traders saw the day's gains as part of a repositioning of the market following a Thursday overnight trade that plunged July to as low as $4.51 and a subsequent race back up that took July as high as $4.983.

During Thursday's daytime session trading the July contract subsequently dropped following the release of a bearish Energy Information Administration (EIA) inventory report. At the close Friday, July had risen 8.3 cents to $4.757 and August had gained 8.5 cents to $4.789. July crude oil tumbled $2.64 to $99.29/bbl.

Wednesday evening (early Thursday trading) at about 7:45 p.m. EDT July Globex futures plunged to $4.510, in what one trader speculated could have been when "someone punched in the wrong amount and sold a bunch. Someone was saying there was a sale of 480 contracts and it got punched in as 4,800, but it did bounce back from $4.51; $4.51 shouldn't have happened and neither should the subsequent buying, which brought July as high as $4.98," said a New York floor trader.

"Friday's close is where traders were expecting the market to pull back to before it worked higher. If nothing happens over the weekend, maybe there will be a slow drift back up. Nothing significant unless some news comes in to rattle the market. If the market should trade below $4.70, then I look for it to try to build a base against $4.50, but I am looking for it to hold at these levels. Friday's close is a decent place for the market to start working higher," he said.

Rattle the market? At 2 p.m. EDT the National Hurricane Center (NHC) was following "an elongated trough of low pressure" that was producing a large area of cloudiness and thunderstorms over the Bahamas and adjacent Atlantic. NHC reported that "surface observations indicated that the area of lowest pressure is located over the northwestern Bahamas moving northward or north-northeastward. Upper-level winds are not favorable for development and there is a low chance, 10%, of this system becoming a tropical or subtropical cyclone during the next 48 hours."

Other traders also see Friday's gains as a reaction to Thursday's decline. July futures settled 17.3 cents lower Thursday, and that may have been overly pessimistic. "[S]ome traders conclud[ed] that Thursday's drop was overdone, given that Thursday's storage build of 80 Bcf was only 2-3 Bcf more than the consensus expectations," said Tim Evans of Citi Futures Perspective in New York. "This may only be a short-term bounce, however, since cooling demand looks more moderate in the weeks ahead, and nuclear power generation continues to ramp higher, with Friday's addition of 1,225 MW of output lifting the overall rate to 88%, narrowing the gap with the 91% five-year average level."

Analysts see a pattern of sub-normal storage builds continuing. "These downsized injections are likely to be extended through the Energy Information Administration reports across the rest of this month. Meanwhile, the Baker Hughes report indicated an eight unit decline in gas-directed rigs, the first drop in three weeks," said Jim Ritterbusch of Ritterbusch and Associates. He added that he is "still viewing the overall up-trend in total drilling activity as a bearish factor as we still anticipate sequential production increases across the summer and into the fall."

"Looking out to next week, we will expect Monday's trade to set the tone for the first half of the week with updates to the temperature views determining price direction. Assuming no dramatic shifts in the forecasts this weekend, we expect some modest upside follow-through in August futures further into the $4.80-4.90 zone. We suggest fresh shorts into this area with stop protection above yesterday's highs on a close only basis. We also favor back spreads such as long February-short August at current levels," Ritterbusch said in a Friday afternoon note to clients.

Market technicians see the broader market advance higher remaining intact unless the July contract falls 30-plus cents. "Does this pullback represent a minor bull market correction or the end of the move up from 3.731?" queried Brian Larose, an analyst with United-ICAP, following Thursday's 17-cent market plunge. "[We] see the ratio retracements of the $4.077-4.983 advance making that determination. As long as these ratio retracements can provide support, higher highs will still be possible. Peg $4.423 (0.618) as the lowest level consistent with a corrective retreat in this case."

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