In fairly muted summer trading, natural gas futures traders began this week much as they had last week as the August contract traveled a narrow 10-cent range before closing the regular session slightly lower. The prompt-month contract stayed between $4.454 and $4.555 before finishing at $4.510, down nine-tenths of a penny from last Friday's close.

The action was eerily similar to last Monday's trade, when the August contract once again traded a dime range before closing down 1.4 cents on the day. If this week continues to hold course with last week, traders can expect two more days of minor declines before an explosion higher on Thursday. Last Thursday the prompt-month contract gained 28 cents.

However, unlike this week, traders last week did not have the burden of factoring in any tropical weather systems. According to AccuWeather.com, two disturbances in the tropics could strengthen and reach the Gulf of Mexico by this weekend if conditions allow. Even more troubling is the belief that one of the systems could chart a course for the eastern portion of the Gulf, an area that has more oil and gas production assets than the western portion of the Gulf, which is where Hurricane Alex tracked late last month.

According to the forecasting firm, there is a "high potential" for one tropical wave to evolve into a tropical depression later this week. "Wind shear is currently hindering any tropical storm organization of this system. However, as the wave moves swiftly west, this shear will diminish over the next few days," AccuWeather.com said. "If the wave were to develop into a tropical storm, models predict the system moving into the eastern Gulf of Mexico by the weekend."

Analysts looking at the supply-demand landscape suggest that any price rallies should be used as selling opportunities. "Fundamentally, the price outlook does not look very bright. There is a lot of natural gas that can be delivered into the marketplace," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

DeVooght conceded that there could very well be "weather-driven or spread-trade rallies, but most likely at this time the rallies will be moderate and of short duration. On a trading basis, we will continue to hold current positions. We will use rallies above $5 on a spot basis to add to our short hedge positions."

He currently advises trading accounts to hold long October $4.50 calls previously purchased at 38-45 cents, while end-users should stand aside. DeVooght advised producers to hold the remainder of a 12-month $5.50 put and short a 12-month $7.50 call initiated in December.

Traders looking to profit solely from a correct assessment of natural gas price direction and not concerned with offsetting a physical position have overwhelmingly sided with the bears, according to recent government figures.

The Commodity Futures Trading Commission in its Commitments of Traders Report for July 13 showed that the managed money component of natural gas futures and options open interest showed a sharp reduction in long positions and major gains in short interest. At IntercontinentalExchange (ICE) long futures and options (2,500 MMBtu) fell a whopping 50,598 contracts to 267,159 and shorts rose by 941 contracts. At the New York Mercantile Exchange long contracts (10,000 MMBtu) rose by 611 to 137,752 and short holding jumped 16,897 to 208,486 contracts. When adjusted for contract size total long futures and options fell by 12,038, and shorts rose by 17,132. For the five trading days ended July 13, August futures fell 32.8 cents to $4.352.

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