Traders continued to damage the recent bullish case on Tuesday as June natural gas futures dropped an additional 14.2 cents to close at $7.637, bringing the week's losses to date to 30.1 cents.

Despite numerous forays to and above $8 over the past couple of weeks, the market has been uncomfortable trading with an $8 handle, retreating immediately following each breach. Even last Friday's $8.100 regular session high was rebuffed as the June contract settled that day at $7.938. While most expect resistance at $8 to give way at some point, the question remains in the timing. Will the bulls break the barrier sooner, or will they be forced to wait until summer heat and hurricane threats are closer to reality?

"This is enough of a decline over the last couple of days to keep us in that sideways choppy mode that we've been in over the last couple of months," said Tim Evans, an analyst with Citigroup in New York. "The recent weakness kept us from breaking loose to the upside from our equilibrium trend. I still see it as a battle between short-term fundamentals, which allows for an above-average rate of storage injections, and intermediate to longer-term fundamentals, where summer heat and hurricanes are going to be a more bullish influence. It is short-term selling versus long-term buying. It also tends to be fund selling against trade buying because I think most players in the trade are happy to accumulate a little extra gas now before the hurricanes hit rather than buying while the hurricanes hit."

Evans said the funds are always a little tricky to decipher. "There is some question when the funds will stop defending their short position by selling more, and they might actually stampede out of the market instead," he said. "The way I read the market they are not ready to get out yet, but I am also not ruling it out a little ways down the road."

Commenting on last week's run-up to $8.100, Evans said the activity made the bears sweat. "Maybe the next time we have a run-up, we don't sell back off immediately. We might end up blasting through $8 because I would imagine that there are larger and larger buy-stops piling up above this thing."

Taking an early look at Thursday's natural gas storage report from the Energy Information Administration (EIA) for the week ended May 4, Evans said he is calling for a 90 Bcf injection. The number revealed will be compared to last year's 81 Bcf build and the five-year average injection of 65 Bcf. "If the number comes in at 90 Bcf, it will be moderately bearish," the analyst said. "We've seen plenty of variances to the five-year average that are in excess of 25 Bcf, so this is not very special. We see it coming, so the surprise would only be if the injection was in the triple digits. That might create a small bearish shock."

Market technicians suggest an important test is looming for the bulls. On Tuesday morning, Walter Zimmerman of United Energy said that last week natural gas futures showed what he calls indications of "potential doji star tops," candlestick patterns that may augur limited upside price potential. In the short term, however, bulls are going to have to stem the decline.

"In wave count terms the first sign of trouble for the bulls will be a decisive close below $7.735 as the 0.618 retracement of the recent $7.508 to $8.105 rally," Zimmerman said. The bears ended up receiving that close on Tuesday. To confirm the bearish case, a decisive decline for the week's trading will be necessary and "on average the seasonal cycle influence points down into late July-early August," Zimmerman said.

Bulls might be able to take some comfort in near-term weather. Temperatures in major energy markets may be high enough to fuel some early air conditioning load. The Weather Channel forecasted that Philadelphia's Tuesday high of 74 will rise to 80 by Friday. The normal high in the City of Brotherly Love is 70 this time of year. In Chicago Tuesday's 77 is predicted to drop to 70 by Friday, and the normal high is 67, the forecaster said.

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