After pounding up against psychological support at $4 over the last few days, the September natural gas futures contract succeeded in breaking through in a big way on Wednesday with a low of $3.838 before closing the regular session at $3.871, down 16.8 cents from Tuesday's finish.

Wednesday's plunge below $4 was the first trip by a front-month contract in exactly three months. The last time a front-month contract traded lower than Wednesday was when the May contract reached a low of $3.810 on April 1.

"We didn't just take out $4 on Wednesday, we demolished it. I sent an e-mail last Thursday to my customers alerting them that futures were approaching $4 -- back in the range that existed between March and June, and that it was time to move," said a Washington, DC-based broker. "I also noted that support would be found at $3.810. Unfortunately my clients did not take action, with a number of them more interested in talking about the 'inevitable rally.'"

The broker noted that while he expects a bounce to be forthcoming, he's having a little problem with talk of a sustained rally. "The most bullish feature out there right now is that I can't find any bulls," he told NGI. "That means to me that at some point this market is going to rally. What it is going to take to ignite that, I do not know. Since Aug. 2 we've had 18 trading days, of which only three saw a higher close than open. The Bollinger Bands are expanding and gas supply continues to be very abundant. This is all very bearish stuff."

While much is being made about just how weak the natural gas futures market currently is, one does not have to look very far back to find a much weaker market picture. Exactly one year ago, the United States had 3,204 Bcf in underground storage and the September 2009 futures contract closed at $2.882. While the current storage level of 3,012 Bcf is 192 Bcf (6%) below year-ago levels, the $3.871 front-month contract close Wednesday is 34% higher than a year ago.

"For all of the negative talk and doomsaying, we're probably not as bad off as we'd like to think we are," the broker added. "Year-ago data proves that because at that time we had even more gas in storage and much lower prices. The glass is not entirely empty here."

Some top traders are advocating a neutral position until more distant delivery months give an indication of market strength. "Some price impact could be forthcoming from the option expiration and Friday's September futures expiry," said Jim Ritterbusch of Ritterbusch and Associates. Ritterbusch noted that "although the front one-month switch [spread] remains comparatively stout at around a 2-cent carrying charge, weakness is still being seen in the more distant March-April spread that tends to provide a barometer of winter supply expectations. We will continue to await some evidence of support in this distant spread prior to suggesting a bullish stance."

Recent data has suggested that the health of the U.S. economy is slipping. Last Thursday the Federal Reserve in Philadelphia reported its index of Mid-Atlantic business activity fell a whopping 7.7% against expectations of a rise of 7%, and weekly jobless claims were reported to be 500,000 compared to the 480,000 the market was expecting. If that weren't bad enough, Tuesday's report on existing home sales showed a decrease of 27.2% to an annual rate of 3.83 million, much less than the 4.65 million analysts had predicted.

Turning attention to Thursday morning's natural gas storage report for the week ending Aug. 20, it appears that much of the industry is looking for a build in the low 30s Bcf, which once again would be bullish compared to historical builds for the week. Last year's date-adjusted build for the week was 54 Bcf, and the five-year average build is 59 Bcf.

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