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August Expires Significantly Higher; September Takes Prompt-Month Reins

Continuing the upward momentum from trading on Tuesday, August natural gas went out with a bang on Wednesday. After starting the day slowly, August reached a high of $7.67 just before expiring at $7.647, up 22.2 cents for the day.

Taking over as prompt month, September natural gas enjoyed a significantly smaller rally Wednesday. The contract settled at $7.592, up 13.4 cents.

"I think we have an interesting little trading bottom of $7.185 on the September chart and the question becomes whether we are in an upward correction from that July slide, or whether we are resuming a larger uptrend," said Tim Evans of IFR Energy Services. "This I believe is yet to be determined. You've already got the heat... If you get a little bit of a storm threat to go with it then maybe it is not an upward correction. It could then be a testing of old highs or a making of new highs."

Commenting on August's expiry, Evans said, "I think we will get an indication over the next day or two on how much of this is a technical short squeeze on August futures and how much of it might be a little bit broader revaluation upward, perhaps tied to things like the record electricity generation for last week."

He noted that the noncommercial traders are really playing a dangerous game in this market. "We've got the funds basically playing Russian roulette with the storm threats," Evans said. "They are essentially betting that the storm threats will ultimately prove benign...and that is a gamble."

Top traders see the concentration in buying interest held by small speculators as a detriment to any price advance. "With long participation in the futures still heavily concentrated within the small trader category, the ability to perpetuate price rallies is currently being compromised," said Jim Ritterbusch of Ritterbusch and Associates.

In its latest report, the Commodity Futures Trading Commission reported that "nonreportable positions," those typically held by so-called small speculators, are overwhelmingly long. Friday's report which documented futures holdings as of July 19, showed nonreportable longs of 72,633 contracts and shorts of 29,034 contracts or a net long position of 43,599 contracts. Traders believe that the smaller speculators are generally less well funded and unable to manage the vicious price swings that natural gas futures are capable of. Price weakness is likely to be exacerbated by such a large number of net long positions held by "smaller" players, traders say.

Ritterbusch suggested what is really needed is a new surge of storm activity to renew bullish enthusiasm. Bulls are keeping their fingers crossed. AccuWeather reports four tropical waves off the coast of Africa. One wave at 28 degrees west longitude and 17 degrees north latitude shows "possible signs of development."

"All in all, this market is looking increasingly like a trading affair with a $7.00 handle attached to it through the coming month until long term weather forecasts and end of season storage levels acquire clearer focus," said Ritterbusch.

Others agreed. "I expect the market to trade in a range of $7.20 to $7.80 over the next few weeks, and I expect things to get real busy once the October contract becomes the prompt month," said a New York floor trader.

Turning attention to Thursday's release of the Energy Information Administration natural gas storage report, Evans said he believes the report for the week ended July 22 will reveal a build of 60 to 70 Bcf. "After being so thoroughly disappointed with the 59 Bcf build last week, I am a little on the high side this week just in case," he said. "We've got more production coming out of the Gulf in this week's report, but hotter temps could be an offset to that. However, there does seem to be supply out there."

According to a Reuters survey of 21 industry players, the report should reveal an injection of approximately 50 Bcf. The ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 44.5 Bcf injection.

Citigroup's Kyle Cooper is looking for a build between 41 and 51 Bcf. "Considering the temperatures, which will rank as the hottest week on record since 1994, a build in our range would be considered slightly bearish on a temperature-adjusted basis," Cooper said. "Obviously, the absolute level is quite bullish. However, the projected moderation in temperatures should lead to rapidly rising injections in August. Actually, the models are in relative agreement with only one model considered an outlier. That outlier is for a build above 50 Bcf."

The number revealed Thursday morning will be compared to last year's 70 Bcf injection for the week and the five-year average build of 66 Bcf.

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