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Technicals, Weather Keep Buyers on Sidelines; July Drifts Lower

July natural gas eased slightly Monday as traders cited weak technicals, and near term weather forecasts are unsupportive. At the close July had fallen eight-tenths of a penny to $4.317 and August was down eight-tenths of a penny to $4.352. July crude oil rose 25 cents to $93.26/bbl.

Technical analysts maintain a bearish market posture as their data shows little tendency for prices to advance. "Our data shows the market is in an 'a,b, c' pattern and that just clicks with our interpretation that the market is bound by a $3.80 to $4.80 range that it just can't get out of," said a Washington, DC, broker.

"The market was threatening to break through the last time up [to $4.983], but it didn't and it set up a very nice case of bearish divergence. The price made a slightly higher high, but the RSI [Relative Strength Indicator] did not make a higher high than it did at the end of April [and] beginning of May. That led us to believe that this was not the time the market was going to break through the upper end of the trading range."

"The big question now is this an impulsive wave back down, or something else. $4.10 to $4 is where I would expect a little bit of support to be coming in, but the bottom of the range is still at the $3.80 level. This should be music to the end-users' ears, but they need to take advantage of it. I hear you tapping your toes, but you need to make it on to the dance floor."

Bears seem to be calling the tune, according to recent data from the Commodity Futures Trading Commission (CFTC). In its most recent Commitment of Traders Report the CFTC showed that for the five trading days ended June 14, managed money added more short futures and options positions than long ones. At IntercontinentalExchange long futures and options (2,500 MMBtu per contract) rose by 37,864 to 534,654 and shorts rose by 14,594 to 54,830. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by 5,399 to 186,143, and short holdings increased by 15,713 to 171,383. When adjusted for contract size, long contracts at both exchanges rose by 14,865 and short futures and options gained 19,421. For the five trading days ended June 14, July futures fell 25.0 cents to $4.581.

Forecasters call for relatively mild conditions in their near-term forecasts. Commodity Weather Group of Bethesda, MD, in its morning six- to 10-day forecast called for normal temperatures throughout the U.S. with the only exceptions being a small area of below-normal temperatures encompassing northern Wisconsin and Minnesota and above-normal temperatures from Mississippi to Arizona with the greatest concentration of heat in Texas.

"Hot weather in the short term is still expected to be much less impressive than the event two weeks ago in the Midwest and East," said Matt Rogers, president of the firm. "While many areas should see peak heat into the low 90s or maybe slightly higher for a few areas, we are still running most spots about five degrees cooler. The flip side is California this week, which should come in same-to-hotter compared to the last event (about 100 degrees in Sacramento and 90 degrees in Burbank). Otherwise, the six- to 15-day period is still lacking significant heat potential in the Midwest, East and South (no signs of severe hot patterns). An active wet pattern looks to prevail, and the main heat chances are in the interior West and then up through Canada on most models."

Bulls can take heart. Analysts see the case building for an eventual end to the pervasive downtrend, which shaved more than 43 cents from the July contract just last week alone.

"The fundamental picture has been improving steadily... Last week's underground storage figures were not bearish at all; they just were not bullish enough to alter the overwhelming momentum that has built up over the last few weeks on the downside," said Peter Beutel, president of Cameron Hanover and publisher of the Daily Energy Hedger. "But prices under $4.30 are going to start to drag buyers from hiding. If we see quotes break $4.20, many more buyers will emerge and, if we should fall beneath $4.10, we would be shocked if buying did not become tremendous. We do not expect it to break $4.10 on the downside," he said in a morning note to clients.

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