Lending some credibility to Monday's bullish bounce, October natural gas futures made a higher low on Tuesday but failed to tack on even 1 cent to the advance. The prompt-month contract added four-tenths of a penny to close Tuesday's regular session at $3.816.

After reaching a low of $3.693 on Monday, the bears could only muster a low-water mark of $3.727 on Tuesday. While somewhat bullish news, the bears also had their high points. After reaching a high of $3.878 on Monday, October futures only reached $3.877 on Tuesday.

Some top traders see the market as vulnerable to continued strong production. "Expectations of continued strong onshore production levels will most likely keep the market on the defensive," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. It is DeVooght's position that with petroleum products closing higher on the week, "the continued spread trading taking place against the oil complex may be part of the cause for lower natural gas prices. On a trading basis, we will continue to hold our current short positions."

DeVooght's current strategy is for trading accounts to hold October $4.500 calls purchased earlier at 38-45 cents, and end-users are counseled to stand aside. Those with exposure to lower prices should continue to hold the balance of a 12-month $5.500 put offset by the sale of a $7.500 call begun in December 2009.

Expectations of continued strong onshore production took something of a hit Monday with the release of monthly production figures from the Energy Information Administration (EIA) (see related story). The report showed a rare decline in Lower 48 natural gas production. June Lower 48 gas production declined to 64.29 Bcf/d from 65.10 Bcf/d in May, according to EIA figures. However, May's production was still above June 2009's level of 62.92 Bcf/d.

While production might be starting to lag, the bulls are not receiving any support from the weather picture in the tropics. Category 4 Hurricane Earl was expected to batter the U.S. East Coast between Cape Hatteras, NC, and Cape Cod, MA, between Thursday and Saturday, while Tropical Storm Fiona, which passed through Africa last week, was expected to take a similar path as Earl, according to AccuWeather.com meteorologist Alex Sosnowski.

"Computer models spray Fiona's track from the east to the west of Earl's path," he said. "Hence the concern for all areas from Bermuda to the Atlantic Coast of the U.S. next week, even after Earl has passed into cold northern latitudes."

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