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End-Users See Little Change in Market Risk; August Eases

August natural gas retreated moderately Tuesday, but risk managers don't see any change in the overall market landscape and suggest that a severe storm may be required to change client's risk assessments. At the close August had eased 1.3 cents to $4.533 and September had fallen 1.3 cents as well to $4.511. August crude oil rose $1.57 to $97.50/bbl.

"In the world of hedging natural gas, I don't expect much until the first major storm," said a California risk manager. He acknowledged the heat in the East, "and that's probably why we are up to $4.53, but my end-user clients have taken the recent 34-cent gain in stride and haven't budged.

"Nobody has rolled up anything and the natural gas market is quiet. I've got long calls out for two years and no one is trading out of those, but there is a lot going on in Washington that is scary and suspect. Although it [debt ceiling discussions] don't have much impact on natural gas, it does impact crude oil and the broader world of commodities."

He added that even if prices were to reach $5, it would probably not spark any interest in long hedges. "It's probably a sale at that point. Even if there were a cutoff of Gulf production, it wouldn't make that much difference. The industrial demand just isn't there."

Although the Dow Jones Industrial Average posted a 202-point gain, "I'm writing off the economy. Bank of America lost almost $9 billion in the second quarter," the risk manager said.

Longer term, technical analysts see the market in a congestion pattern defined by up sloping and down sloping trend lines. The ascending support line is formed by the lows of $2.409 in September 2009 and $3.212 in October 2010. The descending resistance line is defined by the high of $6.108 in January 2010 and the recent $4.983 high posted June 9. The two trendlines converge at approximately the first quarter of 2012.

"Between here and the pivotal $5.000 mark we are looking to the ratio retracements of the $4.983 to $4.064 decline. The 0.618 retracement is just overhead at $4.632 and the 0.7862 is $4.790," said Walter Zimmermann of United-ICAP.

Jim Ritterbusch of Ritterbusch and Associates sees strong heat-derived power generation demand "forcing an adjustment in month-end storage levels compared to most forecasts of early July. Until the dynamic of the elevated trend of CDDs [cooling degree days] subsides or is reversed, some upside price potential will continue to exist in this market.

"So, although we have suggested accepting profits out of any long August positions above the $4.50 level, we are maintaining a bullish trading stance for now in view of the bullish weekend updates to the weather views. While we had allowed for a further price advance into the $4.60-4.69 zone per nearby futures, we feel that additional price gains will prove arduous as a result of strong production."

The ridge of high pressure and warm temperatures isn't forecast to retreat any time soon, although forecasts see a slight moderation impacting the Midwest and East. MDA EarthSat in its six- to 10-day forecast shows the ridge centered over Kansas with an extension into Virginia and North Carolina. "The composite has shifted cooler [Tuesday], though more of this is from progression rather than day-on-day cooler changes," the forecaster said in its morning report.

"The strongest of the heat is now centered over the one- to five-day period, with a cold front expected to come into play early in this time frame from the Midwest to East. The intensity and exact timing of the cooldown is still debated among the models, but at least some moderation is likely. The ridge will rebound in its wake over the central U.S., such that by period's end widespread aboves and MAs [much-above-normal temperatures] should return to the plains and Midwest. The West Coast will still struggle to warm much."

At 5 p.m. EDT the National Hurricane Center reported that Tropical Storm Bret was 330 miles south of Cape Hatteras, NC, and winds were holding steady at 50 mph. It was moving to the north-northeast at 8 mph, and was expected to weaken.

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