July natural gas is expected to open flat Wednesday morning at $2.70 as traders attempt to reconcile decidedly bearish fundamental factors against a nascent bullish technical argument. Overnight oil markets plunged.

Market technicians following Elliott Wave and retracement analysis lean toward interpreting their charts and data as representing a market struggling to put in a bottom. The operative word, however, may be struggling. "[We] still see no evidence of bottoming action on the technicals. However, we do have the essence of a hammer bottom on the daily candlestick chart," said Brian LaRose, a market technician at United ICAP.

"If a reversal is brewing, the first step will be to confirm Tuesday's hammer with a rally Wednesday. No rally, no bottom. In this situation we still prefer to be scale-down buyers with a protective sell stop beneath the $2.443 low," he said in closing comments to clients.

Fundamentals analysts, however, contend that increased industrial demand, exports to Mexico, and a higher power burn will not balance what they see as an oversupplied market.

Recent market strength has been due to short-covering rather than any fundamental tightening, said Michael Cohen, an analyst at Barclay's Commodity Research. "But that rally is now firmly in the rear-view mirror, and barring any large supply disruptions, we continue to see prices trading below the $2.80/MMBtu range.

"Storage now stands at 2,101 Bcf, just 18 Bcf below the five-year average. Given the milder weather, we expect another large build [this] week, which would catapult inventories to or above the five-year average of 2,211 Bcf. Storage levels trading within the five-year average have been rare in recent years. The last time inventories approached the five-year average was on Feb. 13, 2014, and before that, Nov. 22, 2013.

"Our view is that prices will succumb to a rising flood of Northeast natural gas. Despite some production hiccups in the Northeast this week, U.S. gas production is holding steady at around 72 Bcf/d, according to initial pipeline scrapes. Notably, the gas-directed rig count is down some 32% from the start of the year. Although production levels have come off their peak of around 74 Bcf/d in December, current levels are still up 5% year-on-year.

"There are some encouraging signs that sources of incremental demand are beginning to chip away at the supply overhang. These include higher power burns, increased pipeline exports to Mexico and steady demand from the industrial sector. However, these factors on their own will not balance the market. We assume normal weather in our outlook. Anything milder will result in downward pressure on prices and vice-versa."

In overnight Globex trading July crude oil dropped 92 cents to $60.34/bbl and July RBOB gasoline fell 3 cents to $2.0298/gal.