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Front-Month Futures Get 'Double Whammy;' August Pounded

August natural gas suffered a double-digit loss Wednesday as a combination of front-month selling and spread trading combined to pummel futures. Traders are also anticipating the release of modestly bearish inventory figures from the government Thursday. At the close August had fallen 14.6 cents to $4.217 and September had given up 14.9 cents to $4.222. August crude oil slipped 24 cents to $96.65/bbl.

"People were buying November through March but at the same time selling August through October. Another active spread was selling January 2012 and buying January 2013," said Eric Bentley, CEO of VKNG Energy LLC in New York.

The October-November spread has moved about two and a half cents in two days. He added that the day's decline had changed estimates of support to $4.20 and $4.10, but "$4.10 is the number I look at. That may hold if Thursday's EIA [Energy Information Administration injection] number comes in around 87 Bcf," he said.

According to Bentley, the spreads were very liquid and actively traded, but "the black boxes [program traders] are hitting the front months outright. There was simultaneous pressure; that's why the market looks so bad. It was a double whammy."

The concept of $4.10 technical support may indeed get a test Thursday with the 10:30 a.m. EDT release of government inventory figures. Traders anticipate a range of injections from the low 80s to upper 80s Bcf, but often only slight differences from market expectations can send prices soaring or plunging in the moments following the report's release. The figure is expected to have a modestly bearish tone as last year 76 Bcf was injected and the five-year average is 80 Bcf.

Houston-based IAF Advisors expects an 85 Bcf build and Ritterbusch and Associates calculates an 81 Bcf injection. "My guys are at 83 Bcf," said Bentley. Industry consultant Bentek Energy, utilizing its North American flow model along with statistical correlations, expects an 87 Bcf increase.

In a report to clients, Bentek said it considered "the 87 Bcf injection to have equal risk to the up and down sides during the storage week ended July 1. Larger injections week-on-week from the sample in the East and Producing regions is moving this week's projection higher, but demand remains strong in those regions most of the storage week as temperatures continue to be above normal." Bentek said the East Region was forecast to see a build of 58 Bcf, the Producing Region 15 Bcf, and the West Region 14 Bcf.

Top traders see a rangebound market but, nonetheless, one offering trading opportunities. "Trade the range," said Tom Saal and Ed Kennedy of Hencorp Futures in Miami in a morning note to clients. "Buy natural gas in the 'buy zone' between $4.060 and $3.725. Look to sell it between $4.790 and $5.00."

MDA EarthSat in its six- to 10-day forecast sees a broad area of above-normal temperatures encompassing the Mississippi and Ohio Valleys. South of a broad ridge bounded by central New Mexico, northern Minnesota and New Jersey above-normal temperatures are predicted. Coastal California is forecast to be below normal, and the remainder of the country, including most of the Mid-Atlantic, New England and Florida, is expected to be normal.

"The forecast has shifted hotter through much of the central U.S., while at the same time turning a bit cooler in the West. This comes partially in response to better model agreement between the American and European ensembles, which matched these trends," the forecaster said in its morning report. "Recent model biases add additional support for this outcome, especially for the cooler Pacific Northwest. The strongest heat should reside over Texas and the southern Plains, where major drought in place will enhance already hot conditions. While not an exact match patternwise, the MJO [Madden-Julian Oscillation] should be moving through historically warm phases one and two."

Those looking for an improved economy got some positive news Tuesday with the report on May factory orders by the Commerce Department. Orders rose 0.8%, well ahead of April's 0.9% decline, although expectations had been running for a 1.0% advance. Wednesday's economic news was not quite as supportive. The Institute for Supply Management reported that June's non-manufacturing index was 53.3, below expectations of 54.0 and behind May's 54.6 reading.

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