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Managed Money Exiting Longs, Yet July Advances

July natural gas futures moved modestly higher Monday as options expired and traders saw the market holding its own. Recent data shows money managers favoring the "sell" side of the trading ledger. At the close July had risen 2.7 cents to $4.256 and August was up 1.4 cents to$4.264. August crude oil slipped 55 cents to $90.61/bbl.

"I look for the market to trade in a narrow range, but hold $4.25," said a New York floor trader. He added that in Monday's expiration of options trading no strike price seemed to be under attack or defended. "I don't think the volume of the $4.25 strike was all that great."

The crude oil market has been under pressure lately, and although crude and natural gas at present have at best a tangential relationship, natural gas may feel the impact of further crude weakness. "If crude gets down to $85/bbl to $86/bbl then it could take natural gas down to $4," the New York trader said.

Lower prices seem to have been on the minds of directional traders, according to government data. In its weekly Commitments of Traders Report, the Commodity Futures Trading Commission (CFTC) reported a massive exodus from the long side of the market by managed money and a corresponding increase in holdings of short positions. For the five trading days ended June 21 the CFTC said at the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) fell 3,638 to 531,016 and short contracts rose by 12,482 to 67,312. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) plunged by 40,623 to 145,520 and short futures and options surged by 18,361 to 189,744. When adjusted for contract size long futures and options at both exchanges dropped by 41,670 and short positions rose by 21,481. For the five trading days ended June 21, July futures fell 19.3 cents to $4.388.

A weak economy may have been on the minds of the money managers, as top analysts see the natural gas market languishing as the economy struggles. The economic recovery is at best mixed. Last week Q1 gross domestic product came in at a 1.9% seasonally adjusted annual rate, hardly high enough to cause meaningful job creation and below the 2.0% analysts were expecting. May durable goods orders were somewhat better, rising 1.9% compared to the 1.5% anticipated by the market.

"The gas market is being pressured by not only an oversupply but by rising concerns that if the U.S. economy is starting to deteriorate, demand, which has been upticking, could start to deteriorate," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. "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."

In the meantime, however, DeVooght is positioned for a steady if not rising market. He suggests that trading accounts and end-users hold short August $4 put options, and producers and those with exposure to lower prices continue to hold a July-October strip consisting of $4.50 put options offset by the sale of $5.50 calls at even money for 40% of requirements. He also suggests holding $4.75 November-March put options against the sale of $7.00 calls for a 16- to 20-cent debit.

Forecaster Commodity Weather Group predicts above-normal temperatures south and east of a broad arc extending from Pennsylvania to central Missouri to West Texas. Much-above-normal temperatures are seen for the Great Basin and Pacific Northwest.

"Variable conditions continue in the Midwest and East this week with the main heat spike favored just before and during the holiday weekend," said Matt Rogers, president of the firm. "Otherwise, the main six- to 15-day heat focus is in the South and West. We could see stronger much-above-normal levels at times again from central California north into the Pacific Northwest. Frequent above-normal temperatures are also seen in Southern California and the desert Southwest. A cooler pattern is still seen dipping into the Midwest late in the six-10 and into the 11-15 day [forecast] range. In the tropics we continue to monitor possible development later this week in the Bay of Campeche area that would then feed into mainland Mexico or South Texas. No major development concerns are indicated."

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