The July natural gas futures contract enjoyed a bit of a rally in morning trading before knee-jerking lower following the news that 99 Bcf was injected into underground storage for the week ending June 4. After one more run higher, the prompt-month contract ended up closing out the regular session at $4.647, down 3 cents from Wednesday’s finish.

After trading as high as $4.759 prior to the 10:30 a.m. EDT data release, July futures reached the day’s low of $4.628 immediately following the report, which was deemed bearish. Shortly thereafter the bulls made one more run, resulting in the day’s high of $4.808 before values dropped once again.

“The DOE reported a larger-than-expected 99 Bcf net injection to U.S. natural gas storage for last week, also on the bearish side of the 95 Bcf five-year average for the date,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “The week included the Memorial Day holiday, and so this may have had a larger-than-expected impact on demand. Overall, it swings the pendulum back in a bearish direction with regard to the underlying supply/demand balance, correcting sentiment relative to last week’s bullish surprise.”

Most industry expectations were for an injection in the low 90s Bcf, while Bentek Energy’s flow model projected a 97 Bcf build. While larger than the five-year average injection, the actual 99 Bcf build was 10 Bcf smaller than last year’s 109 Bcf injection for the similar week.

Analysts were quick to rally around this point. “The market anticipates that the industry will likely begin to build a year-on-year storage deficit beginning this month.and we don’t disagree,” said Teri Viswanath, an analyst with Credit Suisse. “Given the early weather forecasts calling for warm temperatures throughout the South, we think that it is quite possible that a storage deficit will build through August, providing near-term support for natural gas prices. However, we expect robust inventory builds in September and October to restore ending storage levels back to year-ago levels.”

Viswanath noted that while the EIA now anticipates that 166 Bcf of production will be shut in in the Gulf of Mexico at a -0.54 Bcf/d pace due to the active 2010 Atlantic hurricane season, the substantial increase in onshore production of 1.79 Bcf/d should more than offset this lost production for the remainder of the year.

As of June 4, working gas in storage stood at 2,456 Bcf, according to EIA estimates. Stocks are now 28 Bcf higher than last year at this time and 310 Bcf above the five-year average of 2,146 Bcf. For the week the East Region injected 53 Bcf while the Producing and West regions added 28 Bcf and 18 Bcf, respectively.

Heading into Thursday’s trading, analysts admitted that Tuesday and Wednesday were disappointments for the bulls, but nonetheless see the market holding its ground before a move higher. Peter Beutel of Cameron Hanover says prices may be “in the middle of a correction [and he] would not be surprised to see producer hedging and speculative profit-taking pull prices back towards the $4.25-4.50 area. But we would expect them to stabilize and gather strength for an attempt on resistance at $4.95-5.00 over the following sessions. The technical breakout last week was a very strong one on the charts.”

Technical analysts see the bears needing to prove their case of a seasonal decline. Brian LaRose of United-ICAP suggests “two key support zones must now be broken to confirm a seasonal decline is under way. First up [is] $4.610-4.491. A close below this zone would void the case for a five-wave advance to the $5.230 area. Second [is] $4.063-3.985. Sink decisively below this zone and there is no case for any further upside. If the bears are successful $3.200-2.956 will be our target for late August.”

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