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Traders, Analysts Turning Bullish; July Gains

July natural gas rose Tuesday as traders cited a resilient market and expected forecasts of warmer-than-normal temperatures. At the close July had risen 7.1 cents to $4.388 and August had gained 7.1 cents as well to $4.423. July crude oil added 14 cents to $93.40.

"It seems like there is support down here," said a New York floor trader. He added that the market held the $4.31 area but might have been able to advance further without "other markets getting hit a little bit.

"I think the next move is back to $4.60. I think you've seen some scale-down buying the last couple of days, and I think the market will get up to $4.50 and test $4.60 in the next few sessions. I don't think we will see $4 since the support for this market is in this area, maybe down to $4.25. I don't see it working much lower from here and I think upwards is the next move."

Longer term, analysts have a similar bullish bent but see any gains as possibly short lived. "The natural gas market is taking a further stab at pushing back to the upside, supported by temperature forecasts that continue to show warmer-than-normal temperatures from the Rockies to the East Coast in early July," said Tim Evans, analyst with Citi Futures Perspective in New York. "However, with money managers holding significant long positions already, according to the Commodity Futures Trading Commission, we'd expect the buying pressure to prove limited, with the market remaining vulnerable to bouts of long liquidation on any signs the heat will prove short lived."

Forecasters are calling for a slight warming. In its six- to 10-day forecast, MDA EarthSat shows a broad ridge of above-normal temperatures bordered by Arizona, Wisconsin and Louisiana.

"The forecast has finally taken a step in the warmer direction today after largely trending cooler during the past week," the forecaster said. "Models have backed off the idea of a secondary ridge spike in the West, which has removed the cooler threats to the Midwest as the period progresses. Additionally, increasing trends in the AO [Arctic Oscillation] (or a removal of blocking) should allow for a more northerly storm track. A strong ridge early over the Southern Plains will feed northward by the latter half of the period, bringing with it a notable warming trend through the Plains and Midwest. Much of the East will hold mostly seasonal."

Analysts are watching the economy to determine the outlook for natural gas prices.

"The gas market is being pressured by not only an oversupply but by rising concerns that if the U.S. economy starts to deteriorate, demand, which has been upticking, could start to deteriorate," said Mike DeVooght, president of DEVO Capital. "We continue to believe the highest probability for the gas market is to continue to trade within its protracted range (high $3s to high $4s). On a trade basis, we will continue to hold our producer collars. As it will be for many of the commodity markets, it is going to be difficult for the gas market to have a major sustainable rally in the face of weaker economic growth in the U.S."

Traders will get a good look Friday at the strength of the economy with the release of final gross domestic product (GDP) figures for the first quarter. Expectations are not high as the market is looking for Q1 GDP at a seasonally adjusted annual rate to have grown a lean 1.9%, just slightly ahead of the prior estimate of 1.8%.

To cope with what seems by all accounts to be a directionless market, DeVooght covered short calls on Monday and "will look to sell puts if the market breaks another 20 cents. We will continue to use rallies into the mid to high $4 level as a selling opportunity, primarily utilizing collars and selling call premium. If we break back under $4.15, we will book profits on the short calls and sell put premium. Not exciting, but the best way (in our opinion) to trade this market until we get a break of the range. We will continue to hold our current collars and will look to sell calls if we trade back above $4.60-4.70 or sell puts if we break below $4.15."

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