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Black Box Traders Start Selling; July Falls

July natural gas futures retreated Wednesday as traders observed interest by systematic traders re-emerging on the sell side, and little concern from surprises in Thursday's government inventory figures. At the close July was down 7.1 cents to $4.317 and August had skidded 7.3 cents to $4.350. August crude oil added $1.24 to $95.41/bbl.

"I think the black box traders are out here selling," said Eric Bentley, CEO of VKNG Energy LLC in New York. "We have seen a little fund selling into the [inventory] number, and the bears won the bull-bear scrimmage today. I think there was initiating of new short positions going into the report."

He said the traders who bought into rise to the $4.85 to $4.90 area were mostly gone, and "they are looking to reload on the short side of the market. If they can't play the market higher, they will play it lower. There is no [tropical] activity, and the weather is just seasonal.

"The surprise for this market would be for it to trade above $4.50. That would shock a lot of people. The market should be well supported down into the $4.20 to $4.25 area. The black box traders are likely to cover down there since it's an area of good support and traders are likely to be falling all over each other trying to get in front of one another to cover. It would take a big [injection] number to get us below $4.15, and I don't think it's going to happen. We are hearing a number in the 85 Bcf range."

Others see a build in that range as well. For the week ended June 17, a Reuters poll of 26 traders and analysts fell within a sample range of 76 Bcf to 95 Bcf with an average of 88 Bcf. Ritterbusch and Associates expects an increase of 84 Bcf, and Citi Futures Perspective's Tim Evans is looking for an increase of 82 Bcf. Last year 81 Bcf was injected, and the five-year average stands at 86 Bcf.

Warmer temperatures are expected to have an impact on storage, and Evans sees the outlook as adding to the storage deficit relative to the five-year average and adding upward pressure on prices. Evans' 82 Bcf estimated build is lower than the five-year average, and he sees that trend continuing into early July.

Evans' model shows expected builds of 76 Bcf, 76 Bcf and 71 Bcf for the weeks ending June 24, July 1 and July 8, respectively, below the five-year average builds of 77 Bcf, 80 Bcf and 80 Bcf for the same weeks. "With the storage flows as forecast, the year-on-five-year storage deficit would widen from the 76 Bcf level as of June 10 to a 101 Bcf shortfall as of July 8. A widening deficit typically puts upward pressure on prices over the immediate term, but we also see the natural gas market as already saturated with speculative long positions," Evans said in a Tuesday afternoon report to clients.

In its 11- to 15-day forecast Commodity Weather Group of Bethesda, MD, calls for above-normal temperatures throughout the entire United States, with the only exception being Florida and portions of the Gulf Coast. Matt Rogers, president of the firm, calls the prediction "tricky nonetheless as the models have some serious unresolved timing differences in the six- to 10-day period in which the GFS [Government Forecasting System] is faster in spreading heat eastward (and stronger in cooling off the West).

"The European [model] (our preference) still does spread the heat into the Midwest late in the period, helping lead to the warmer six- to 10 composite [Wednesday]. In the 11-15, we are aligned most with the European ensembles, which carry some modest heat through the East. However, both the European and American ensembles suggest some renewed cooling for the Midwest during the period, but again disagree on the timing. Again, here we prefer the European timing."

The National Weather Service calls for a somewhat more narrow occurrence of warmth. In its eight- to 14-day outlook it predicts above-normal temperatures across a broad northeast-southwest trending band bounded by a line from southwest Arizona [to] North Dakota on the north and a line from Gulf Coast Texas to Washington, DC, on the south. Northern California and the Pacific Northwest are expected to be below normal.

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