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Bears On The Prowl Following Storage Data; July Tumbles

July natural gas on Thursday repeated its performance of a week ago and fell hard following the release of seemingly constructive inventory data. The Energy Information Administration (EIA) reported an increase of 69 Bcf in its weekly inventory report, well below historical averages, but prices suffered a double-digit loss. At the close July had fallen 16.5 cents to $4.412 and August dropped 16.1 cents to $4.450. July crude oil added 14 cents to $94.95/bbl after declining $4.56 in Wednesday's trading.

"The build of 69 Bcf was closely aligned with consensus expectations. It was supportive relative to an 87 Bcf five-year average, but that much had already been discounted into the price and we think the market will quickly pivot to looking ahead to near-average builds in the next few weeks," said Tim Evans of Citi Futures Perspective, New York. Evans also said he expects the market to work toward $4.25 and possibly lower "if the temperature outlook allows it and heavier long liquidation is triggered."

Others are more focused on long-term demand. "I think there are some bullish aspects to the market out there, but it's hard to get excited. It's going to come down to demand and not the supply [side of the market]," said Mike DeVooght, president of DEVO Capital, a Colorado trading and risk management firm.

"On the bullish side you could say 'with all this natural gas production coming on line, where is it going?' Is the demand that strong or maybe they aren't producing as much as they thought? On the other side of the equation it comes down to demand and the economy. For the manufacturing sector is demand that strong?" DeVooght asked rhetorically.

It was just a week ago that July futures traded as high as $4.983 but traders have long since adapted to the swings in the market. "We are still doing the same thing. We are buying the high $3 natural gas and selling the high $4 gas," said DeVooght. Many of his trades involve the selling of call premium at the high end of the range and selling put premium at the low end. "You can make 20 to 30 cents on those trades, which is sometimes better than trading the outrights [futures]. It's one of the best hedges.

"You pick up 20 to 30 cents and [if you sell call premium] you have to be willing to give up the gas, but if you are selling at $4.60 to $4.70 [and collecting call premium], how many times have you been able to sell gas above $5 in recent times? You are only giving away three months at a time and it seems to me to make sense."

Prior to the release of the storage figures, bears were hoping for a repeat of last week's post inventory report trading when an ever-so-slightly-bearish injection figure resulted in a July futures market drop of more than 17 cents. Last week the EIA reported a build of 80 Bcf for the week ended June 3. Traders surveyed by Reuters expected an average 78 Bcf build, yet for just a 2 Bcf differential prices swooned.

This week is eerily similar. The market was looking for a build about 20 Bcf less than historical figures, and with overall inventory levels running 255 Bcf less than last year and 58 Bcf short of the five-year average, the ball was clearly in the bears' court, and the bears delivered. Last year a stout 89 Bcf was injected and the five-year average build is 87 Bcf. The folks at Citi Futures Perspective were expecting the 10:30 a.m. EDT report to show an increase of 71 Bcf and Houston-based IAF Advisors forecast an increase of 69 Bcf. A Reuters poll of 23 market players revealed a sample average of 70 Bcf with a range of 62 Bcf to 83 Bcf. By 10:45 EDT, 15 minutes after the release of the data, the market had digested the 69 Bcf figure and July futures were down 10.2 cents at $4.475.

Temperature and cooling-degree-day (CDD) data clearly indicated the likelihood of a sub-par storage build, but that was little consolation to the bulls. For the week ended June 11 the National Weather Service reported New England received 29 CDD, or 21 more than normal, and the Mid-Atlantic "enjoyed" 51 CDD, or 32 greater than its normal accumulation. The Midwest from Ohio to Wisconsin sweltered under 62 CDD, or 34 more than its historical tally.

All of this comes amidst volatile trading in petroleum, equity and currency markets. On Tuesday the Dow Jones Industrial Average soared 123 points on favorable economic news, but plunged 178 points Wednesday as the risk of a default in Greece increased, and the euro fell by nearly 2%. July crude oil sank $4.56 to $94.81/bbl.

Thursday offered no let up in the flow of economic data. The 8:30 a.m. EDT release of May housing starts showed builders began 560,000 units at a seasonally adjusted annual rate, above the 547,000 initially forecast. The market's initial reaction was lukewarm, but the Dow Jones Industrial Average managed to gain 64 points to 11,961 at the close.

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