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Traders Mull Weather, Strong Rig Count; July Advances

July natural gas futures rose Friday as traders calculated that expected warmer weather would pare storage injections in upcoming weeks. At the close July had added 3.6 cents to $4.229 and August was up 3.3 cents to $4.250. August crude oil gained 14 cents to $91.16/bbl following a $4.39 plunge on Thursday.

"We would reiterate that the short-term temperature views suggest smaller-than-normal storage injections across most of next month, a dynamic that will likely contain any significant narrowing in the supply deficit against either year-ago or average levels," said Jim Ritterbusch of Ritterbusch and Associates in a post-close note to clients.

Commodity Weather Group of Bethesda, MD, forecasts a broad area of above-normal temperatures throughout the eastern three-quarters of the country with the exception of Florida in the six- to 10-day period. "Some of the better model agreement this morning is on heat from the central Rockies to the Great Lakes during the six- to 10-day period, and our forecast does spike temperatures higher, at least briefly, for mid-period in the Midwest and late period on the East Coast," said Matt Rogers, president of the firm. "In the 11- to 15-day forecast, the models continued the trend on cooling the Midcontinent, though the large areas of normals [temperatures] are not confidence-inspiring, while the heat is mainly in the interior West. In regards to all the normals in the East, our take is that the above-normal temperatures could linger across the South, while the Upper Midwest could lean into the belows at times."

Ritterbusch also sees the market encountering increasing production. Oil field services firm Baker Hughes reported for the week ended June 24 an increase of three in the number of gas rigs to 873, down from the hefty 958 count a year ago. Horizontal rigs, those common to shale plays such as the Haynesville, Marcellus and Bakken, rose by 20 to 1,081, and total rigs operating in the U.S. increased by 22 to 1,882.

"We feel that this production factor will continue to keep prices below the $5 mark as this summer proceeds, even allowing for an occasional strong hurricane. But at the same time, we also believe that downside possibilities are limited from here unless the temperature views beyond the first week of July begin to show a significant cooldown. We are sidelined for now but may look to approach the long side of the August contract this week depending upon weekend updates to the temperature forecasts," he said.

Going into Friday's trading, analysts saw an opportunity following Thursday's report-driven decline. "[Thursday's] decline took prices below $4.20, and they finished there. It was the lowest price intraday and at the bell in a month," observed Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm. "It was the year's second-largest build in stocks, and it sent prices reeling back to where they had started, essentially.

"We think that this is a buy, here or near here, and prices are oversold and are into support on the charts and on top of the lower red Bollinger Band. Add to that the latest weather reports calling for hotter-than-normal temperature readings starting this weekend and we see an opportunity to rally back to the other end of the $4 handle. This week's storage build has the bulls on their heels, but hot temperatures and technical buying signals should turn prices back up [Friday] or early [this] week."

Hot temperatures and technical buying will have to lock horns with an economic environment that is decidedly tepid. There was little inspiration to be found in the release of Q1 gross domestic product figures from the Department of Commerce. Expectations were that first quarter growth would be 2.0%, but the actual figure came in at a soft 1.9%. More positive news surfaced in the form of May durable goods orders, which rose 1.9%, ahead of market expectations of a 1.5% rate. Any sustained advance in natural gas prices, according to traders, will require a solid economic underpinning, and the reports can best be described as mixed.

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