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Analysts See Lower Storage Builds; August Gains

August natural gas futures managed to hold on to early gains and settle squarely in the bullish camp perplexing some traders. Longer-term observers see a strong physical market and the need to price in reduced injections in upcoming weeks. At the close August had risen 8.3 cents to $4.288, and September had gained 7.3 cents to $4.277. August crude oil fell $1.05 to $95.15/bbl.

Short-term traders were somewhat surprised at the market's gains. "I thought [last week] we would come in lower, but the market came in about 5 cents better and spiked early, but came off and was limited to a 3-cent range for the remainder of the day," said a New York floor trader.

"Crude and heating oil markets were hit a little bit today [Monday], and I thought we would fall off more, but I still think we will test down to $4.05 by Thursday. It looks like someone wants the natural gas market higher; it's definitely possible that someone is trying to defend a long position. We'll get a better feel for the market in the next couple of days, and if it gets below $4.20, I think we'll see $4.05. Tomorrow [Tuesday] if it comes in better and traders try to run with the market [higher], maybe some of those shorts in the market from last week in the low $4.20s may have to cover. No one is talking weather. There really isn't anything to write home about."

Forecasters call for normal temperatures along the East Coast and that may not be worth writing home about, but for the mid-section of the country the near-term outlook is much different. Commodity Weather Group in its six-to-10 day forecast calls for a broad ridge of above-normal temperatures extending from Idaho and Nevada as far east as central New York and Alabama.

"[I]n the past 24 hours there has been a trend to shift the East Coast hotter again in the 11-15 day, after a closer-to-seasonal situation through the six-10. The core of the strongest heat is still expected in the Midcontinent, though," said Matt Rogers, president of the firm. "This east-west wobbling of the left and right flanks of the hot ridge may continue to offer heat chances to the East Coast and Southwest/California in the weeks ahead. The Tropics are quiet, but the American operational models continue to throw out random 11-15 day developments. These are probably false alarms, especially since the more skillful European guidance shows nothing yet."

Others see something of a tag team between supportive weather and a strong cash market. "This market presented a surprise rally today [Monday] that again appeared largely temperature-driven. Weekend updates to the 1-2 week views solidified last week's widespread forecast of a return to above normal temps across a broad portion of the country," observed Jim Ritterbusch of Ritterbusch and Associates. Thus storage injections are going to need to be reduced. "As a result of these continued warm weather outlooks, we still look for storage injections to be downsized [in] the Thursday EIA reports to be issued through the balance of this month. As evidence of a continued strong underlying tone to this market, we will further cite the newly developed inversion in the front August-September switch."

"Some of today's strength in the curve appeared to emanate from a strong physical market that came out of the gate this morning at around the $4.40 area per next-day pricing. All in all, this market still looks like a battle between a bullish short-term demand factor and a bearish long term supply element in the form of a continued strong production pace," Ritterbusch said in an evening note to clients.

Top analysts see little change in the supply-demand balance of the natural gas market. "On a fundamental basis, not a lot has changed; we have more than adequate production and flat demand," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

From a trading perspective, DeVooght still sees a rangebound market and is able to extract gains by utilizing options trades. "On a trade basis, we continue to trade the range. This past week we sold the puts when the market traded under $4.15. We will continue to use rallies into the mid-to-high $4 level as a selling opportunity, primarily utilizing collars and selling call premium. If we break back under $4.15, we will book profits on the short calls and sell put premium. Not exciting, but the best way (in our opinion) to trade this market until we get a break of the range."

Going forward, DeVooght says he "will continue to hold our current collars and will look to sell calls if we trade back above $4.60-4.70 or sell puts if we break below $4.15."

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