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Futures Gain on Short Squeeze; Sellers Lie in Waiting

August natural gas futures advanced Thursday following the release of government inventory figures and on the basis of buy orders prompted by systematic and algorithmic traders. The Energy Information Administration (EIA) reported an increase in natural gas inventories of 78 Bcf, slightly lower than market estimates, and the market immediately jumped off session lows. At the close August had added 5.9 cents to $4.374 and September was up 5.9 cents as well to $4.393. August crude oil rose 65 cents to $95.42/bbl.

"The market looked pretty much under pressure when we came in this morning, but even with a [injection] number that was at expectations, we saw some pretty significant system buying at the front end of the curve," said Eric Bentley, CEO of VKNG Energy LLC in New York.

"It was mostly systems and black boxes, and with the market over $4.34 it looks in good shape to hold support. At $4.40 to $4.42 there are a number of guys poised to sell with no significant heat on the horizon A lot of guys making weather trades are baffled since a lot of the weather forecasts are for normal temperatures. Today was mostly a short squeeze led by the systems traders."

Bentley added that he saw a number of "Market If Touched" buy orders at the day's lower levels, and that may have tripped some of the short sellers before the number came out. "A number of guys had loaded up on the short side of the market at $4.25, so they are probably out now. They are headed to the beach with lighter pockets," he mused.

Analysts found the EIA report helpful to the bulls. "The 78 Bcf build was slightly less than the consensus expectation, but neutral compared with the five-year average and more than the 63 Bcf build for the same date last year," said Tim Evans, analyst at Citi Futures Perspective, New York. "In short, we see it as mildly supportive. There may have been some timing issues involved in the lower number, which follows the surprising 98 Bcf build in the prior week."

Expectations were for a higher-than-normal increase in Thursday's release of EIA inventory figures. Bears fondly remember last Thursday's 12.4-cent loss following a plump 98 Bcf increase, which was about 10 to 15 Bcf greater than what traders were expecting to be reported.

Estimates going into the report estimated a slightly higher build. John Sodergreen in his weekly survey for Energy Metro Desk Express showed a median 80 Bcf injection from his sampling of 36 traders and analysts. Evans calculated a build of 83 Bcf, and Bentek Energy, utilizing its North American flow model as well as statistical tools, correctly forecast the number with an 78 Bcf estimate.

Last year 63 Bcf was injected and the five-year average is 77 Bcf. Storage now stands at 2,432 Bcf and the deficit is 243 Bcf relative to last year and 63 Bcf when compared to the five-year average.

For the week ended June 24 Bentek suggested that its estimate of 78 Bcf could err on the low side. "The large build reported by EIA last week [98 Bcf] could weigh in if storage facilities have started to behave differently in response to higher demand. Temperatures are only about three degrees warmer week on week, causing the decrease in injections from the previous storage week," the firm said in a report. Bentek said the East was likely to inject 54 Bcf, the Producing Region 11 Bcf, and the West Region 13 Bcf. The actual figures were a 55 Bcf build for the East, 13 Bcf in the West, and 10 Bcf in the Producing Region.

At 5 p.m. EDT the National Hurricane Center (NHC) reported that Tropical Storm Arlene had moved ashore in northeastern Mexico holding 40 mph winds and was expected to decrease to a tropical depression.

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