After rallying nearly 30 cents on Thursday following word of a 78 Bcf storage injection for the week ending July 9, August natural gas futures finished the week on a weaker note Friday as the contract closed the regular session at $4.519, down 6.7 cents from Thursday's close but 11.7 cents higher than the previous week's finish.

Market watchers were eager to see which direction the market would take Friday after an interesting week of trading. The prompt-month contract dropped a couple of pennies each day from Monday through Wednesday, but that changed on Thursday as the bulls recorded a 28-cent gain. The upside was probed once again early on Friday as a $4.659 high was recorded just prior to the regular session's start. However, the upward momentum fizzled and the August contract put in a $4.472 low in the afternoon before inching higher to close.

"The recent trend was definitely bearish, but trading on Thursday did some work to combat that argument," said a New York-based trader. "However, the market still finds itself closer to $4.500 than $5, so the bulls still have a fair amount of work to do before I change my perception on this thing. Natural gas futures shrugged off the prolonged heat wave in the East earlier this month, and the fairly quiet tropics are failing to add support. The National Weather Service said during the week that it expects warmer-than-normal temperatures through September, so there is still some time for the heat to take a bite out of storage. Also, as the calendar migrates into the middle to later part of the summer, we also will be entering the peak hurricane season. It's been said before, but I'll say it again...it only takes one [hurricane] in the Gulf production areas to change the whole fundamental picture."

Rafferty Technical Research broker Steve Blair said trading over the next few months will likely be "a drib-drab type of affair" unless a storm gets into the Gulf of Mexico. "Based on the expectations of tropical weather this year and the forecasts for continued heat, the bulls have more going for them than the bears," he told NGI. "However, if we don't get a production-impacting storm in the Gulf, we'll likely head lower in the intermediate term."

With August futures soaring 28 cents Thursday in the face of abundant supplies, analysts are anticipating a challenging trading environment. "While conceding to a bullish temperature factor, we will also leave open the possibility of another price downdraft back into the $4.300-4.400 zone where long-term price support will be forthcoming," said Jim Ritterbusch of Ritterbusch and Associates. He admits that "a return to such levels will require a shift toward cooler weather patterns within the upcoming short-term updates. Overall, we anticipate a very tricky trading environment within the next couple of months as storm activity becomes a more formidable force amidst a market that will remain amply supplied."

Thursday's meteoric gains demonstrated that at least in the short run natural gas prices remain largely decoupled from economic data. Thursday's report by the Federal Reserve showed that June industrial production slowed. Expectations were for a decline of 0.2% and the actual figure came in at 0.1%. Analysts attributed the small gain largely to weather-driven gains in output from the utility sector. Capacity utilization was 74.1%, up slightly from the 74.0% traders were anticipating. On a year-on-year basis, industrial production rose to 8.2% from 7.9% in May, and the question is whether this slowing is temporary or further growth is likely.

Tom Saal of Hencorp Futures in Miami in his work with Market Profile suggested Friday morning that prices might work lower before advancing. His analysis showed that prices were likely to test Thursday's value area between $4.416 and $4.619. Following that he anticipates a test of a second value area at $4.766 to $4.900 and "maybe" a test of $4.937 to $5.224.

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