September natural gas managed a modest gain Wednesday as traders positioned themselves ahead of the weekly inventory report. For every trader anxious to cover a short position there seemed to be another willing initiate a new sale. At the close September had risen nine-tenths of a cent to $4.003 and October added nine-tenths of a cent as well to $4.024. September crude oil rebounded from steep losses in the last two sessions, adding $3.59 to $82.89/bbl.

“Tuesday you saw a big reduction in open interest and that short-covering continued Wednesday as prices traded as high as $4.081,” said Eric Bentley, CEO of VKNG Energy, LLC in New York.

“Whether it was a squeeze or something else, there were definitely some guys looking to cover positions initiated below $4.15 and maybe some bad positions they established in the low $3.90s area. There is still heat in parts of the Southwest, and the market will continue to trade off that.

“We are hearing an injection number for Thursday of as low as 31 Bcf, but I am looking for 30 Bcf to 35 Bcf based on what I’ve heard from some financial institutions. This market doesn’t seem to be making much progress below the $3.80 area. We are just seeing the bottom of the range from about $4.60 just a few sessions ago down to $3.80. Guys are looking to take some money off the table and that was reflected in the open interest Tuesday,” he said. With September trading as high as $4.08 Bentley noted that some traders were “absolutely” willing to reload on the short side.

And with good reason. Bullish or bearish inventory numbers aside, spot futures have traded lower the last four Thursdays following the release of Energy Information Administration (EIA) inventory data. Last Thursday September futures tumbled 14.9 cents to $3.941 following an EIA report of a 44 Bcf build.

“The market drifted back down after trading higher, but quickly caught a bid when it traded below $4. Don’t be surprised if we see a run-up to $4.15 following the inventory report. Maybe a pop higher, then down, down, down like the last reports.”

Expectations for Thursday’s inventory build are tightly bunched. Houston-based IAF Advisors calculates a 33 Bcf increase and a Reuters survey of 25 analysts revealed a 37 Bcf sample mean with a range of 31 Bcf to 48 Bcf. Industry consultant Bentek Energy is looking for an injection of 36 Bcf. Last year 36 Bcf were injected and the five-year pace is 37 Bcf.

Bentek thinks the number could come in even lower. “Based on the sample, Bentek considers the 36 Bcf injection to have most of the risk to the downside. During the past five weeks, Bentek’s forecast has been under EIA’s report, putting the risk to the upside,” the firm said in a report. “The Producing Region is making most of the difference as withdrawals increased 50% from the prior week. The West is also contributing to a lower injection as activity decreased by 20% week-on-week, while the East Region remained relatively flat.”

Bentek is forecasting a build in the East Region of 42 Bcf , a withdrawal of 9 Bcf in the Producing Region, and an increase of 3 Bcf in the West Region.

John Sodergreen, publisher of Energy Metro Desk, in an earlier survey of 16 industry players showed a similar injection. He came up with a median 37 Bcf injection from a sample of 16 industry players.

Analysts suggest Tuesday’s 5.9-cent gain was only a response to an earlier abundance of selling. Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm, said, “They were oversold in the support [zone] of the lower red Bollinger Band and ready to rally back over the psychologically important $4.00 level. The trade has consistently been buying over the summer when prices have been below $4.00/MMBtu.”

From a fundamental standpoint things are going to have to get a lot warmer to sustain higher prices. “Temperatures are expected to remain fairly moderate and seasonable through this week in the Great Lakes and Northeast regions,” Beutel said in a morning note. “Even as far south as Memphis, readings are expected to be predominantly in the upper 80s or low 90s through this weekend. Great Lakes readings will be in the upper 70s. The bulls need triple digits for a sustained period across the country.”

Sustained higher prices may not be in the cards, but lower prices seem to be off the table. “There is plenty of current production to meet demand, and it will take hotter readings to generate fresh buying. July was one of the hottest months on record, and it was not enough to trigger enough buying to push quotes significantly higher. And at this stage there are no major tropical threats that are likely to lead to widespread curtailment of output. Still, the trade sees prices beneath $4.00 as bargains,” he said.

Tom Saal, in his work with Market Profile, noted that the recent decline, which took prices as low as $3.855 on Monday, has “been very orderly.” Saal saw little market movement in early trading and expected the market to test Tuesday’s value area, which he pegged at $4.035 to $3.991, about where the market opened. Also of note are “pockets of illiquidity,” also known as “trend-day space” in Market Profile parlance, and these also represent trading objectives. Saal pegs trend-day space at $4.114 to $4.134 in the September contract.

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