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$3.75 August Futures Seen In Play, Expected Down 5 Cents

August natural gas is expected to open 5 cents lower Tuesday morning at $3.80 as traders focus on downside trading objectives, another 10 cents lower than Monday's weak settlement. Overnight oil markets rose.

Below-normal temperatures are expected to prevail, according to near-term weather forecasts. Commodity Weather Group in its six- to 10-day outlook shows a large ridge of below-normal temperatures stretching from eastern Wyoming to eastern Pennsylvania and from well north of the Canadian border to central Mississippi. "An impressive cool trough is expected to shift down into the Midwest for the six-10 day range with another round of moderate to much below normal temperatures," said Matt Rogers, president of the firm, in its Tuesday morning report.

"Despite big picture agreement, there continue to be detail differences. The European guidance this morning backed away from bringing as much cooling to Texas in the six-10 day, for example, but skepticism abounds given the intensity of these cool events here in July. But there is general agreement at least that the Midwest to Tennessee Valley probably sees the coolest anomalies, regardless of how much reaches Texas and also the East Coast (weak cooling). Otherwise, the forecast edged a bit hotter today in the Southwest and California (especially one-10 day). The European ensembles show a potential warm push into the Midwest by late in the 11-15 day, which is a reasonable risk, but like the others, it would probably be a temporary situation."

It is outlooks like these that have analysts revising their price forecasts. "Although [Monday's] sharp selloff of around 10 cents was...around 2.5%, an additional 10 cent reduction in value appears likely possibly by midweek if mild temperature forecasts get stretched further into the first week of August," said Jim Ritterbusch of Ritterbusch and Associates in closing comments Monday.

"The weekend updates favoring another major cool-down beginning later this week and extending through next week forced fresh six-month lows that in turn appeared to ignite another speculative selling spree. Although there has been a large speculative rotation toward the short during the past couple of months, it appears that large institutional traders have plenty of additional ammo to employ toward bearish strategies. Last week's swing to contango in the front switch further reduces the appeal of short positions in reinforcing our expectations for a further price decline toward the $3.75 area. Thursday's weekly EIA storage report won't likely offer much assistance since the supply surplus will again be reduced sizable by around 55 Bcf, in our opinion. This summer dynamic of deficit contraction has been much stronger than expected as a result of mild weather conditions and as a result, we expect this market to be amply supplied when stocks peak in early November. We caution against attempts to pick a bottom to this sharp price decline."

Mild weather also translates into stout storage injections and the current pace is well ahead of this time last year. "Weather-adjusted storage injections have been strong in the East consuming region this year," according to industry consultant Genscape. "Dominion Transmission injected 9.0 Bcf into the ground for week ending July 18th. This is lower than last week's high injection of 10.0 Bcf, lower than a seasonal high of 13.0 Bcf but higher than the 2.0 Bcf of injection in the same gas week last year. Dominion Transmission's gas inventory is currently at 163 Bcf [and] storage inventory is currently -74.0 Bcf lower than the same time last year.

"Columbia Gas injected 7.0 Bcf into the ground for week ending July 18th, [and] injections this year in the past two weeks is faster than the previous year [as] the injection for the same gas week last year was 2.9 Bcf. Columbia Gas inventory is currently at 125.0 Bcf, +93.3 Bcf higher than the low of 31.7 Bcf on April 4th. Storage inventory is currently -49.8 Bcf lower than the same time last year," the company said in a report.

In overnight Globex trading, August crude oil gained 19 cents to $104.78/bbl and August RBOB gasoline added 2 cents to $2.9145/gal.

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