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Futures Teased Higher by Weather Forecasts

August natural gas futures continued to advance Tuesday, making it three consecutive gains driven in large part by expectations of higher temperatures raising cooling load and limiting storage injections. Traders caution, however, that at some point the market may reach a point where further forecasts of warm weather may not have much impact and prices could tumble. At the close August had risen 4.5 cents to $4.333 and September had gained 3.5 cents to $4.312. August crude oil gained $2.28 to settle at $97.43/bbl.

"I could see the market getting up to the $4.38-4.44 range. Beyond that range the shorts are likely to get nervous," said a New York floor trader.

He added that if the shorts got nervous and had to cover, prices "could get to the $4.50s to low $4.60s." Closer to Tuesday's trading the trader identified support at $4.29 to $4.33, "and beneath that $4.18 to $4.21. $4.28 to $4.29 should hold on any pullback," he said.

According to Tim Evans, analyst at Citi Futures Perspective in New York, "The natural gas market is once again probing the upside, supported by warmer-than-normal temperatures that should limit storage injections over the next few weeks. While this fundamental trend is certainly supportive, the question remains whether it will prove supportive enough to translate into a more sustained or dynamic price advance." The capacity of the market to respond to forecasts of warmer temperatures is not limitless and at some point a "failure to rally on bullish weather forecasts could also leave the market vulnerable on the downside, much as it did a year ago. We are currently neutral regarding the immediate natural gas outlook," said Evans.

Other analysts see supportive fundamentals and technicals. "The bottom line is heat," said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm and publisher of Daily Energy Hedger. "If temperatures are on the hotter side, it is going to be supportive. It is bullish three times. It is bullish when we get the forecast, like [Monday]. It is bullish when we actually get the heat, which drives up cash prices and generates buying. And, finally, it is bullish a week later, when we see the results of the heat on underground storage injections.

"When we have hot readings (or cold in winter), especially if they are sustained, it helps [support prices] immensely. If we get the hot forecast or temperatures when prices are near a major support level -- like $4.00/MMBtu right now -- or when prices are oversold, the buying receives an extra multiplier effect."

The forecasts just keep getting warmer. WSI Corp.of Andover, MA, said that Tuesday's forecast is warmer than Monday's and calls for "above and much-above-normal temperatures...to encompass most of the central and eastern U.S. with the exception of Florida. Anomalies as warm as 8 to 12 degrees above normal are forecast over the northern and central Plains.

"The lowest confidence in [Tuesday's] forecast exists along the Eastern Seaboard; temperatures may trend warmer along the Eastern Seaboard than currently forecast if the European operational model comes to fruition. The European operational model depicts the strongest eastern ridge late next week and is the warmest of the medium-range models along the Eastern Seaboard next Thursday and Friday."

Some technical analysts remain unconvinced that the 15-cent gain in the August contract over the last two sessions [as well as Tuesday's 4.5-cent advance] is the start of any sustained advance. Brian LaRose, analyst at United-ICAP, sees "no change" in the technical picture. "Bulls still need a decisive close above $4.304-4.377...to confirm the leg down from $4.983 ended at $4.064. Successfully clear this small area of contention and a multi-day correction of the $4.983-4.064 decline would be expected at minimum. Sink below $4.123 before $4.304-4.337 can be exceeded and $3.899-3.889 will be our next downside target."

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