After coming within spitting distance on Monday of the $3.155 low for the move recorded on April 27, August natural gas futures rallied a bit on Tuesday as a fair amount of short-covering came into the market. The prompt-month contract gained 16.6 cents Tuesday to close at $3.429.

While a gain is a gain, some market watchers were unimpressed with natural gas, even as August crude went its own way and recorded another drop, down 17 cents to $59.52/bbl.

“Even though it tried to put a solid day in, crude futures still settled lower, but natural gas rebounded, which could be expected after dropping within 7 cents of this year’s low, which was also a six-and-a-half-year low,” said Gene McGillian, a broker at Tradition Energy. “I think the market was probably overdue for a bit of a correction, but I don’t think anything has really changed fundamentally. I know there was a report of a possible tropical wave developing off of the coast of Africa, but I don’t think the mere possibility would cause the market to turn. I think we were just oversold, which sparked some short-covering as some guys took some money off the table before it makes another attempt to push down below the $3.155 level.”

McGillian said that from where he sits, the fundamental picture has yet to strengthen. “I know we are expecting a pretty good injection in this week’s storage report and there is no real weather to speak of in the next two to three weeks in most of the eastern half of the country. The market is also still searching for signs of declining supply after the drastic cutbacks in gas rigs over the last number of months. To date, we still haven’t seen it.”

In discussing how low prices could go here, McGillian noted that the natural gas market has found itself in a “perfect storm” for bears. “Depending on who you talk to, we’ve seen the worst economic conditions since the Great Depression, large increases in domestic gas production and completely unsupportive weather conditions,” he told NGI. “We haven’t seen any real heat around the country yet this year except for Texas, but Texas is always hot at this time of the year, so I think people discount that a bit. The Midwest and Northeast have been mild so far by any classification.”

Calling Tuesday’s rebound “temporary,” McGillian said he thinks lower prices are still ahead unless the economy finally begins to turn around in a meaningful way. “Prospects of an economic recovery have driven gas prices back above $4 twice in the last two months, but neither time proved to be the real deal,” he said. “I think this correction Tuesday is more of a healthy sign for the downside. As we drift toward August expiration, we are going to be under pressure until bidweek.

“I think we could see prices dip below $3 this year. We’ll either see it rather quickly, or we are going to have to wait till after the meat of hurricane season. No one is really going to want to get aggressively short during the peak of storms. As we get into the latter part of the season, we could put a two in front of the price, barring any real warm-up in the major gas usage regions of the country.”

Going into Tuesday’s trading session, one analyst sounded the alarm about the 18.29:1 price ratio of crude to natural gas, noting that such a large ratio might set up a test of recent natural gas support and ultimately $3. Peter Beutel of Cameron Hanover called Monday’s August contract settlement “dangerous.” He contended that “as long as the ratio is that high and as long as it refuses to show any signs of improving or decreasing, it is going to be very difficult for natural gas prices to hold above the major support at $3.155. That level now looks thoroughly compromised to us. By that we mean it is just a matter of time now before it is broken. And once $3.155 has been broken, we would assume that the $3 level will follow in fairly short order.”

Others see trading in the hands of very nervous sellers. “Now that prices are low you are seeing cautious selling. Traders have their finger on the trigger to buy it back. The market is running out of sellers, but traders are still trying to push the market lower,” said a New York floor trader.

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