With temperatures boiling to over 100 degrees up and down the East Coast and traders tallying just how much gas was lost last week due to Hurricane Alex shut-ins, natural gas futures traders explored the upside coming off the long holiday weekend. Despite running higher during the day, the August contract ended up closing at $4.682, down half a penny from Friday's finish.

Earlier in the day the prompt-month contract ran up to a high of $4.900 before receding into the afternoon. With a prolonged stretch of heat and continued unrest in the tropics, the question is whether the bulls now have the traction necessary for a sustained run higher. Tuesday's failure might argue that they don't.

Citi Futures Perspective analyst Tim Evans said recent fundamentals are all suggesting a run to the upside. "Hurricane Alex may have cost the market 3-4 Bcf in production last week and there's a new system near the Yucatan Peninsula that will at least keep the market focused on the forecasts for an active hurricane season," said Evans. "Triple-digit temperatures in the Northeast are now supporting the cash market and forecasts for warmer-than-normal temperatures for much of the U.S. in the 11- to 15-day forecast period suggests ongoing strong air conditioning demand on into late July. And while there may be an argument that none of these elements is a compelling bullish story, we don't see anything in the bearish column that would constitute an offset."

According to meteorologists at AccuWeather.com, a storm system crossing the Yucatan Peninsula Tuesday may develop into Tropical Storm Bonnie as soon as Wednesday across the western Gulf of Mexico. The models show the storm's path potentially disrupting oil cleanup and containment efforts through the middle of the week before threatening the Texas and Louisiana coasts.

Some of the top traders see searing eastern heat and resultant power demand as the near-term price driver. "We still view this demand off of gas-fired EG [electrical generation] activity as a key driving force behind near-term natural gas price movements," said Jim Ritterbusch of Ritterbusch and Associates. He did admit, however, that "renewed broad-based selling across a large portion of the commodity spectrum could take some steam out of our forecast for industrial demand improvement this summer; we still feel that a near record level of supply has been discounted and that market surprises are apt to fall toward the bullish side. Consequently, we suggest holding any long positions established at the beginning of last week anywhere across the curve."

Forecasters are calling for an aggressive heat wave. "A dangerous and record-challenging heat wave will affect much of the East this week as high pressure anchored offshore the Carolinas continues to act as a heat pump. In some locations this heat wave will rival many that have occurred in the past 20 years with the potential for up to a several-day stretch of temperatures in the upper 90s to low 100s from southern New England to the Carolinas," said AccuWeather.com meteorologist Alex Sosnowski.

"Cities from Hartford, New York and Philadelphia to Washington, DC, Raleigh and Columbia will swelter. Temperatures over the Independence Day weekend were just a warm-up compared to how nasty the weather will get, especially for those who do not have air conditioning or must do manual labor outdoors," he said. "The highest temperatures will occur on Tuesday and Wednesday in northern areas, while the Carolinas will feel the inferno later in the week as the core of the heat wave shifts to the south."

Directional traders -- those who are not concerned about risk management or offsetting a physical position -- added to their natural gas short positions, according to the most recent Commitments of Traders Report from the Commodity Futures Trading Commission. For the five trading days ended June 29 managed money increased the number of short futures and options contracts and decreased the number of long positions.

At IntercontinentalExchange long futures and options (2,500 MMBtu) rose 6,645 to and short holdings declined 8,433 contracts to 31,177. At the New York Mercantile Exchange long futures and options fell by 3,483 to 138,927 and shorts rose by 11,945 to 194,653. When adjusted for contract size total long futures and options at both exchanges fell 1,822 contracts and shorts rose by 9,837. For the five trading days ended June 29, August futures fell 24.6 cents to $4.548.

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