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Specs, Commercials Show Buying Interest, Yet July Softens

July futures recovered from an opening loss but still couldn't manage to make it into positive territory Wednesday. Bulls and bears seem almost evenly divided, but short-term traders did note a return of commercial buying interest. At the close July had eased 0.4 cent to $4.577 and August fell 0.2 cent to $4.611. July crude oil tumbled $4.56 to $94.81/bbl.

Traders were relieved that July futures were able to hold the recent low of $4.51 reached during a crazy session one week ago when July plunged to $4.51 in what some considered an errant trade but subsequently rocketed higher to $4.983 just prior to plunging on the heels of a slightly bearish Energy Information Administration (EIA) report of an 80 Bcf inventory injection.

"We gravitated down to the low end of the range and there is definitely scale-down buying at these levels," said John Woods, president of J.J.Woods and Associates. "Once you get below $4.55 you definitely see it."

Not only was there speculative interest at these lower price levels, but commercial interest as well. "We saw buying in the more deferred portions of the curve. There was trade buying in the 2012 and 2013 strips, and that was more or less in alignment with the spot contract trading below $4.55. There was buying by both speculative and commercial interests," Woods said.

"The charts show we are headed higher. The market traded up to $4.605 in a heartbeat, and that just shows how fast this market can move."

Traders Thursday will be seeing how fast they can ready their orders following the 8:30 a.m. EDT release of EIA inventory figures. Expectations are for a build considerably lower than the 89 Bcf injected last year and the five-year average of 87 Bcf. A Reuters survey of 23 traders revealed an average 70 Bcf with a sample range of 62-83 Bcf. Tim Evans at Citi Futures Perspective is forecasting a 71 Bcf gain, and Kyle Cooper of IAF Advisors in Houston anticipates a 69 Bcf build.

Others aren't so convinced the market is headed higher. "In the natural gas market we're seeing some further minor price erosion off the relatively benign current temperature outlook," said Evans. In his view, prices may have one more chance to rally off last week's high temperatures "if we get a bullish surprise in Thursday's storage report, but we think a build along the lines of our own 71 Bcf forecast has already been pretty well discounted into the price. Once the storage figure is known, we expect a renewed focus on the more moderate current and forward temperatures, with prices to test the downside further. We continue to think a test of the $4.25 area is likely, with a further drop if temperatures remain moderate and a more significant round of long liquidation is triggered."

Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm, thinks the recent decline has relieved much of the overbought pressure on the market.

In his view the market is no longer overbought and "will be at levels that traders will start to find appealing to buy again soon. Under $4.50, we should expect to see scaled-down buying begin. It will become especially good if prices get beneath $4.25. We should expect to see more erratic trading from here on in. Hot weather will return as early as [Wednesday], and the forecasts will be more and more important as prices start to find levels from which they can strike higher again."

Forecaster WSI Corp. of Andover, MA, in its six- to 10-day outlook said, "Above-normal temperatures are forecast over most locations south and east of Chicago. Anomalies as warm as 7 degrees above normal are anticipated over the southeastern U.S. Below-normal readings are expected to encompass the northern Plains." In its 11- to 15-day forecast WSI Corp. shows the area of above-normal temperatures expanding to include the southern Plains with below-normal temperatures limited to the West Coast.

Observers of the economy noted some positive news on retail sales Tuesday, which prompted strong gains in equity markets but had little impact on natural gas. July futures sagged 6.5 cents, but the Dow Jones Industrial Average rose more than 123 points to 12,076, and crude oil jumped $2 to $99.37/bbl. May retail sales came in better than expected as the market was expecting an automobile-led decline of 0.3% but the actual figure was minus 0.2%.

Wednesday's economic news, however, wasn't so hot. The risk of a Greek default increased, and the euro fell by nearly 2%. The Dow fell 178 points, or 1.5%, to 11,897. The day's economic news was mostly unfavorable, including a rise in core inflation, a sharp drop in home builder data, and a big contraction in the Empire State manufacturing report.

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