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Traders Eyeing Lower Prices, Yet August Gains

August natural gas managed a modest end-of-week gain Friday, but both long-term and short-term traders were not optimistic about the likelihood of any market turnaround following Thursday's losses. At the close August had risen 7.2 cents to $4.205 and September was up 6.6 cents to $4.204. August crude oil plunged $2.47 to $96.20/bbl following a weak employment report.

"On Fridays we've always had a little bit of short-covering, but the market still looks like it wants to test down to $3.95 next week," said a New York floor trader.

He added that buyers were ready, and "we should see scale-down buying all the way down, but I look for a test of $4, maybe when the [storage] number comes out. Spread trading was active: the August [contract] flipped over the September; traders were buying the October-November and it moved out from 12 to 16 cents."

Analysts suggest that forecast warmer temperatures may have difficulty lifting prices higher in the near term.

"The natural gas market is seeing a modest price recovery after Thursday's storage disappointment and is getting some help from an 11-15 day temperature outlook that features above-average temperatures across most of the continental U.S.," said Tim Evans, an analyst with Citi Futures Perspective in New York. "That said, we continue to see only a moderately supportive storage trend that may not be sufficiently supportive to steer prices back to the upside in any more sustained fashion. We continue to see the market as quite similar to a year ago when 12 consecutive weeks of above-average temperatures -- record-setting overall -- created a storage trend but failed to prevent prices from chopping sideways to lower."

Air conditioning loads may get a boost if near-term weather forecasts prove correct. Analysts at Commodity Weather Group in Bethesda, MD, in their six- to 10-day forecast show a massive ridge of high pressure centered over Nebraska but extending as far east as Ohio and South Carolina and as far west as Utah and Idaho. Only California is expected to be below normal.

"[Friday's] forecast is overall same-to-hotter. Like [Thursday], we continue to see variations in the eastward and westward reach of a prominent middle of the continent hot ridging pattern," said Matt Rogers, president of the firm. "...[M]ore often than not, the hot ridge center is tied up in the middle third of the nation. There continues to be risks for thunderstorm offsets, particularly through the Midwest, but the heat coverage and occasional stronger bursts of intensity are still most dominant. The West is still favored to see an impressive cooling in the six-10-day following by another round of heat in the 11-15 that should rival the recent heat event. Timing on this next one was slightly slower today. The tropics remain quite quiet."

Other analysts are also skeptical that the weather outlook is capable of doing the bulls all that much good.

"Although the weather factor still appears skewed toward the bullish side with above-normal temps projected across most of the eastern half of the U.S. to about the 21st of July, the weather factor has been temporarily pushed to the back burner," contends Jim Ritterbusch of Ritterbusch and Associates. He anticipates "a CDD- [cooling degree day] related uptick in EG [electricity generation] demand as this month proceeds. Rallies could prove difficult given the short-term technical picture that was altered appreciably with [Thursday's] price breakdown. So, although we will caution against shorts at current levels given unfavorable risk/reward ratios, we will also advise against longs at the present time with the large speculators back in control on the short side." Position-wise he is on the sidelines "looking for a place to re-establish a long position."

Fundamental analysts looking for the market to receive some support from an improving economy were disappointed with the 8:30 a.m. EDT release of employment figures from the Labor Department. Going into the report the market was looking for gains in June non-farm payrolls of 110,000, up from May's weak 54,000 improvement. The unemployment rate was anticipated to hold at May's stubbornly high 9.1% rate. The actual figures showed non-farm payrolls inching up by a measly 18,000 and the unemployment rate climbing to 9.2%.

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