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Long-Term Storage Deficit Seen Growing; August Gains

August natural gas futures rose Monday as traders anticipated the long-term storage deficit becoming wider. At the close August futures had risen 5.2 cents to $4.363 and September had added 4.1 cents to $4.371. August crude oil bounded higher, posting a gain of $1.95 to $96.89/bbl.

Top analysts see the longer-term storage deficit widening as warmer-than-normal temperatures prompt refills less than the five-year average.

"The natural gas market has...probed higher levels [Tuesday], although the tropical Atlantic Basin remains quiet and the temperature outlook little changed from where it was on Friday," said Citi Futures Analyst Tim Evans in a note to clients. "The outlook for warmer-than-normal temperatures has been extended through July 19, but it looks to us as though there's enough supply for the warmer temperatures to translate into near-average storage injections for the week ending July 22. The year-on-five-year storage deficit of 63 Bcf as of June 24 will widen moderately to 88 Bcf as of July 22, according to our model. Time will tell whether that proves supportive enough to wedge prices higher or whether disappointment leads to a further round of long liquidation once temperatures moderate. We continue to see risk that prices could fall to the $4.00 area over the next few weeks under this scenario."

Production continues at a robust pace, and that support may be difficult to come by. Peter Beutel of Cameron Hanover observed that "Last week, the EIA [Energy Information Administration] reported Lower 48 gas output at its highest level in six years, at 69 Bcf/d. Continental production is a much larger proportion of U.S. gas output now than it was after Hurricane Katrina (2005)."

Market technicians see the natural gas market caught in a long-term triangle congestion pattern characterized by a series of lower high prices and higher low prices going all the way back to the fall of 2009. At some point the market will break out of this pattern and Walter Zimmermann of United-ICAP says, "Bears need to break below the $3.890-3.590 support zone. Bulls need to break above the $5.000-5.500 resistance zone.

"We know for a fact that getting long natgas below 20% bulls on the Market Vane 'Bullish Consensus' [indicator] has been a very profitable strategy for over two years now. What we do not yet know is whether the recent 21% bulls indicates enough shorts are on board to spark a multi-week rally."

Forecasters are calling for mainly normal temperatures across Midwest and eastern energy markets. Commodity Weather Group in its six- to 10-day outlook calls for occasional heat but not at June levels. Above-average temperatures are predicted for a broad ridge bounded by North Carolina, central Iowa, southeastern Colorado and West Texas. Idaho and portions of the Pacific Northwest are also expected to be above normal.

"Temperatures are pulling back this week across the Midwest and East after last weekend's stronger heat levels, but there are indications of another surge of hotter weather into the Midwest and East early next week," said Matt Rogers, president of the firm. "This one should peak at about the same levels (low to mid 90s) and not reach the hotter levels seen in June. Otherwise, the South and interior West continue to see the most persistent heat opportunities over the next two weeks."

The tropical Atlantic is quiet, although the National Hurricane Center in its 2:05 EDT report said it was following two tropical waves, one extending from 20N 42W to 11N 47W and the other from 22N 87W to 15N 85W.

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