Traders were prepared for anything Tuesday as the debate swirled on whether there would be enough momentum left from Monday's natural gas futures price jump to fuel another round of short-covering. The answer, at least for now, is "no," as the July contract dropped 12.7 cents to settle at $8.064.

After trading lower in the overnight Globex session, the prompt month couldn't even manage to climb as high as Monday's $8.191 close on Tuesday as the contract traded between $8.010 and $8.165 during the regular trading session.

"Tuesday's action might have confirmed that the short-covering went a little too far on Monday, but it certainly isn't bearish," said Tom Saal with Commercial Brokerage Corp. in Miami. "Monday was a textbook example of short-covering by funds -- end of story. It had nothing to do with heat or any of that. On Tuesday, the funds couldn't follow through because they had shot off all of their bullets on Monday. Tuesday was an inside day on the technical charts with a lower high, higher low and lower close, so we will probably head lower again on Wednesday."

Looking ahead, Saal said the market is currently difficult to call. "I think we tested the top end of the range in the $8.20 to $8.30 area, so if we can't get any momentum back to the upside Wednesday, then we are probably going to drop back below $8 and test $7.750."

With a number of industry storage report expectations centering on another build of 100-plus Bcf, some are questioning why comfortable storage levels are not enough to ease prices. Saal said it is because he sees the natural gas futures market's relationship with storage levels undergoing a potentially drastic change.

"The market so far has taken these triple-digit injections in stride. The large builds really haven't created a negative price reaction as of yet," he said. "Clearly, last year was a warning of sorts. We had the lack of hurricane impact in the Gulf of Mexico, but we had hot weather and significant air conditioning demand in certain parts of the country. This actually created storage withdrawals in the summer, which I think is the beginning of new things to come in this market."

Saal was referring to the storage reports for the weeks ended July 21, 2006 and Aug. 4, 2006, when 7 Bcf and 12 Bcf were withdrawn from underground storage due to heat. The five-year averages for those weeks at the time were injections of 65 Bcf and 61 Bcf, respectively.

"This is why I believe the market is still apprehensive about storage supplies this year," the broker added. "The market is shrugging off the high injections and the healthy storage level comparisons because it does not believe that everything is comfortable. The market believes we could again have some withdrawals this summer."

Traders are aware that July natural gas futures are at a crossroads following Monday's bullish $8.191 close. Whether the prompt month has enough momentum to push above resistance in the $8.400 to $8.500 range will be the major test.

Even as Tropical Storm Barry proved to be a harmless tune-up for the 2007 Atlantic hurricane season, one analyst pinned Monday's price hike on significantly warmer-than-normal temperatures forecast for mid-June.

"Tropical Storm Barry may have missed producing areas of the Gulf of Mexico, but a storm of a different sort pushed prices higher on Monday anyway, as stronger cooling demand forecast for mid-June sparked a bout of short-covering," said Tim Evans, an analyst with Citigroup in New York. "Cooling demand normally reaches levels that translate into declining storage injections in June anyway, but the warmer-than-normal readings expected across most of the continental U.S. from mid-June will put further limits on the rate of refills."

Evans added that the price upturn is also putting "fresh pressure" on fund managers as they are forced to handle their "substantial net short exposures." Whether they buy a dip, give chase at the market, defend the top of the range or reverse to long positions in the hope of profiting from ongoing heat and possible hurricanes later on, Evans said he believes "time is running out on these short positions, with the $8.400 peak in July futures from May 18 as the key corresponding price benchmark."

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