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Futures Consolidate Following 'Lack of Leadership' in Either Direction

Taking somewhat of a break while still holding recent gains, July natural gas futures quietly traded within a slim 12-cent range Tuesday before settling at $7.127, up half of a penny from Monday's close.

Despite the fact that a number of regions of the country have started to see warmer temperatures, Commercial Brokerage Corp.'s Ed Kennedy sarcastically reminded his clients that "it gets warm every summer." He also noted that temperatures are not that much above normal.

"There are really no fundamentals to support any further move here to the upside," the broker said. "There may be a chance of storm development in the Gulf of Mexico late this weekend or early next week, but we will have to wait to see about that. There is not a lot here and the futures market has no leadership in either direction. We are not going anywhere, folks."

Kennedy also noted that July natural gas also managed to ignore crude futures on Tuesday, which showed some weakness. July crude ended up settling 73 cents lower at $53.76/bbl on the day.

"In natural gas, we are at what traders call 'price control' for the time being," he said. "We will see what kind of consolidation we get and take it from there. Trading was really quiet [Tuesday]," he added.

As for the current natural gas inventory situation, Kennedy said storage levels are higher than they normally would be this time of year. "There is no problem there."

Taking a slightly different view, AG Edwards Vice President Bill O'Grady said much of this recent advance in natural gas futures is anticipation of demand increasing. He noted that it would be possible to eliminate the current storage overhang very quickly and get back to a normal inventory level. "This is the time of year when hot weather can trim injections and bring inventories closer to normal levels."

Current working gas inventories stand at 1,778 Bcf, or 226 Bcf more than a year ago and a whopping 304 Bcf more than the five-year average. However, the abundance of stored gas has been of no concern to traders recently as July futures have increased by 91.5 cents since the close on May 26.

O'Grady observed that there currently does not appear to be any supply shortage, but if the summer turns hot and stays hot, natural gas supplies suddenly would not be so robust. "It all comes down to persistence," he said. "Weather forecasts are naturally bullish when the weather is hot, but the question is if the weather will be hot consistently or will it change?" he said.

He is skeptical about the upcoming hurricane season. "Hurricanes will catch everyone's imagination, but realistically the odds are quite slim of them having an impact on Gulf production," he said. "Last year was really a fluke, and although it doesn't mean you can ignore hurricanes, they certainly don't become important very often."

O'Grady said he has been monitoring the spread between September and December, noting that it has gotten unusually cheap. "That spread took off with the recent advance in the futures, but it is still cheap by historical standards," he said. "I would like to buy the September and sell the December at a wider differential than it has been."

On May 31, the difference between the September and December contracts stood at $1.163, but by the close Monday it had narrowed to 96.2 cents, figures show. Traders find spread trades attractive because they require substantially less margin than the purchase of an outright futures position.

Honing in on the Energy Information Administration's storage report Thursday morning, the early industry estimated range for the week ended June 3 appears to be 95-110 Bcf.

Ron Denhardt, vice president of natural gas services for Strategic Energy & Economic Research Inc., said he is looking for an injection of 105 Bcf for the week. Citigroup's Kyle Cooper said he expects the report to reveal a build between 101 Bcf and 111 Bcf.

Industry projections are almost on target with historical comparisons. The number released Thursday will be compared to last year's 100 Bcf build and the five-year average injection for the week of 99 Bcf.

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