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NatGas Cash Outdone By Exuberant Futures; September Adds Dime

Physical natural gas for delivery Thursday made modest gains on average as strong performances in the Gulf, Texas, Midcontinent and Midwest were more than able to counter a soft California market, flat Appalachia pricing and a weak Southeast. The NGI National Spot Gas Average rose 3 cents to $2.60.

After a dime loss on Monday and further erosion on Tuesday, futures bulls got their due as traders turned their attention to Thursday's storage report by the Energy Information Administration (EIA). The increase looks to be the smallest gain for this date since 2010.

At the close on Wednesday, September had added 10.6 cents to $2.839, and October was higher by 9.8 cents to $2.881. September crude oil said "no" to continued sub-$40 pricing and jumped $1.32 to $40.83/bbl.

Futures bulls were not to be denied.

"The natural gas market has turned higher from the middle of its recent trading range, supported by a warmer temperature forecast than a day ago and expectations for a 5 Bcf net injection into U.S. natural gas storage for the week ended July 29, a supportive figure compared with a 54-Bcf five-year average for the date," said Tim Evans of Citi Futures Perspective in a mid-session report to clients.

In spite of the day's gains, Evans sees risk to the downside. He noted that "natural gas is trying to maintain a price surplus to a year ago when July 22 storage was still 436 Bcf higher than a year ago. We also see some potential seasonal weakness as declining power loads over the next two months or so will remove some of the more urgent demand, allowing storage tanks to refill at a stronger rate. We think prices could fall to a more conservative valuation in the $2.40 to $2.50 range under this scenario."

Last week the thin 17 Bcf storage build sent September futures on a 21-cent tear higher, but this week looks to be even thinner. ICAP Energy calculated a draw of 4 Bcf, and Tradition Energy is figuring on a 1 Bcf build. A Reuters survey of 20 traders revealed an average 2 Bcf increase with a range of -6 Bcf to +10 Bcf.

Gas buyers in the daily market had their hands full as the National Weather Service reported that much of the central United States is expected to continue baking.

However, "a potent upper-level disturbance tracking eastward along the U.S./Canadian border will support the development of a well-defined surface low across the Dakotas and eventually lifting northward into Canada.

"The area of the country with the greatest potential for heavy rain and flash flooding will be the Four Corners region, especially the higher terrain of Arizona and New Mexico. The heat and humidity are forecast to continue unabated across much of the central and southern U.S. Heat advisories are in effect from eastern Texas to Mississippi where heat indices could easily be in the 100 to 110 degree range, perhaps even higher at times."

Tom Saal, vice president at FCStone Latin America LLC, in his work with Market Profile said to look for the market to test Tuesday's value area at $2.770 to $2.746. Following that he said to follow the Market Profile Monday/Tuesday Breakout Rule, which provides current price momentum for trading entry and exit for the week. Prices have to first break either higher or lower from the initial balance at $2.876 or $2.746. He placed objectives higher at $2.950 and $3.024 and lower targets are at $2.654 and $2.580.

Other traders see playing a breakout as a way to approach the market as well.

"Bears need to push natgas beneath the $2.625/2.591 lows to make a case for a deeper retreat," said United ICAP technical analyst Brian LaRose. "Bulls need to lift natgas over $3 to revive the up trend. As long as natgas remains range-bound we are stuck in a holding pattern."

LaRose is "looking for a drop to $2.500-2.468 minimum if the bears can take out support. Looking for a pop to $3.190 minimum if the bulls can get through resistance."

In physical market trading Wednesday, warm Midwest temperature forecasts helped keep a bid under the market.

AccuWeather.com forecast that Chicago's Wednesday high of 87 would rise to 91 Thursday before dropping back down to 85 Friday, 2 degrees above normal. Detroit's 89 high Wednesday was expected to also reach 91 Thursday but hold through Friday. The normal high in the Motor City is 82.

Next-day gas on Alliance added 8 cents to $2.81, and gas at the Chicago Citygate gained 9 cents to $2.85. Gas on Consumers rose 8 cents to $2.83, and packages on Michigan Consolidated advanced 6 cents to $2.80.

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