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July Gains as Funds, Black Box Traders Fall Into Bullish Camp

July natural gas took another small step higher Wednesday as traders adjust to strong interest by algorithmic and fund players and expectations of much-below-normal inventory increases in a government inventory report Thursday.

At the closing bell July futures had risen 1.6 cents to $4.847 and August was up 1.6 cents as well to $4.874. July crude oil jumped $1.65 to $100.74/bbl.

"Natural gas open interest has gone up significantly the last few sessions and that indicates new length and system buying, which in turn is squeezing holders of short positions," said Eric Bentley, CEO of VKNG Energy LLC in New York.

"You should see the market supported at $4.75 [even] with tomorrow's inventory report. Everyone is talking heat and weather," he said. When queried whether market injection estimates in the high 70 Bcf area had been factored into the market, Bentley was not sure. "For non-machine-oriented trading that was in place four or five years ago, I would say yes, possibly, but super computers will buy and continue to buy and the big funds are in pre-storm hype. I think the market will be well supported, but it could reach a point where profit-taking sets in and people will be running for the exits pretty quick if it breaks decisively through $4.75.

"The big black box funds are driving the bus, so you don't want to get in their way."

The short-term technical picture improved with the July contract trading as high as $4.873 and surpassing recent market resistance at $4.85, traders said.

The 10:30 a.m. EDT Thursday release of storage data by the Energy Information Administration may be a chance to test the $4.75 support theory should the storage figure come in above market estimates. Estimates currently reside in the upper 70 Bcf area. A Reuters survey of 25 analysts revealed an average 78 Bcf sample mean with a range of 68 Bcf to 90 Bcf. IAF Advisors of Houston is looking for a build of 79 Bcf, and industry consultant Bentek Energy calculates a 78 Bcf build. These will be compared to last year's date-adjusted 98 Bcf increase and a five-year injection of 96 Bcf.

In its weekly report Bentek said it considered its 78 Bcf estimate to have equal risk both higher and lower. "Pipeline [internet data] scrapes indicate a potential lower injection as temperatures warmed up. The risk of a higher injection is due to the traditional low demand during the Memorial Holiday weekend that despite the hot weather might not have lowered injections as much as projected." Bentek forecasts an injection in the East Region of 47 Bcf, a build in the Producing Region of 18 Bcf and an increase of 13 Bcf in the West Region.

Analysts suggest that traders will have plenty of temperature and tropical events on which to feed during this injection season. "Even though yesterday [Tuesday] was hardly the steep gainer that Monday had been, temperatures continued to climb in the three major geographic corners of the country (Texas, Chicago, Northeast)," observed Peter Beutel, president of Cameron Hanover and publisher of Daily Energy Hedger. "Yesterday, temperatures were in the high 80s and they are expected to break 90 degrees today in the Northeast. People here consider that hot -- very hot. Prices registered a new high for the recent move as a result of the forecast."

Tropical conditions in the Atlantic have subsided, and "the possibility of this year's first Atlantic tropical storm seems to have diminished yesterday, after having been at a coin-toss odds on Monday. It now seems unlikely that a tropical wave under observation Monday will make it to the next stage. Nevertheless, June 1st starts the tropical storm season, and this was an early shot across the bow reminding traders that they need to be on guard for more than hot temperature readings. They certainly are this market's bread and butter, but hurricanes and tropical storms can be game-changers that alter the market picture quickly."

According to figures from the Energy Information Administration, 53 Bcf of production is likely to be lost from storm-related shut-ins, well ahead of last year's minimal 8.5 Bcf.

Sea temperatures and conditions elsewhere are still ripe for storm formation, however. The National Hurricane Center is following Tropical Storm Adrian in the Pacific, now with winds at 60 mph and expected to reach hurricane status within the next 48 hours.

Weather forecasters are still predicting above-normal heat in the Southeast, but see the risk to their forecast in the form of cooler temperatures. In its six-to 10-day forecast WSI Corp. of Andover, MA said, "Above-normal temperatures are forecast over the south-central and southeastern U.S. Anomalies as warm as 7 degrees above normal are anticipated in the warmest locations. More seasonable readings are expected to encompass the West Coast and the northern tier of the country.

"Temperatures may trend colder over the northern tier of the country and warmer over Texas and the southeastern U.S. than currently forecast. Medium-range models all depict a moderate to strongly negative AO [Arctic Oscillation]/NAO [North Atlantic Oscillation] pattern developing over North America next week."

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