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August Higher But Still in a Trading Range

August natural gas made it four in a row and continued to march higher Wednesday, prompted by reports showing extended heat over the eastern two-thirds of the country. At the closing bell August had risen 7.0 cents to $4.403 and September had tacked on 7.5 cents to $4.387. August crude oil rose 62 cents to $98.05/bbl.

"Even with all this heat we are still in a trading range," said a Washington, DC, analyst. "We have had to adjust our screens to show a band between $3.70 and $5 and that goes back months and months.

"If we were able to get to the $4.80s, I have plenty of producer clients that would be willing to sell. That should put the winter months over $5 and for a lot of producers anything with a $5 in front of it they are happy to take." The analyst conceded that the hurricane season was just beginning, "but unless a storm hits Pittsburgh, it's not going to be important."

"It does look to me that the combination of the heat, the short-covering we have seen in the market and technical indicators could push the market higher, but I'm not looking for anything out of the trading ranges we have been seeing. We are talking to all of our producers and saying, 'If you didn't sell last time, here is your chance again.' What happens is when prices get down to $4, they take some money off the table, but the end-users have become very complacent. A lot of people aren't doing the lock in prices, and there has been no compelling reason for them [to hedge].

"I did have one deal that went out to 2016, and maybe some are saying this isn't going to last forever; either we will export natural gas or start burning it in cars if oil goes to $200/bbl. For 2011 into 2012 I don't think there has been a lot of urgency on the buyers' side."

Traders will no doubt have a sense of urgency Thursday morning if their estimates of the weekly inventory report should prove incorrect and the market takes a one-way trip against them.

Estimates for the 10:30 a.m. EDT report by the Energy Information Administration are in line with last year's 78 Bcf build, but generally short of the 88 Bcf five-year average. A Reuters poll of 26 analysts and traders showed a sample mean of 76 Bcf with a range of 50 Bcf to 89 Bcf. Ritterbusch and Associates forecasts a build of 75 Bcf and Bentek Energy, utilizing its North American flow model augmented with weather adjustments, predicts a gain of 78 Bcf. Bentek forecasts a build of 51 Bcf in the East Region, 16 Bcf in the Producing Region and 11 Bcf in the West Region.

In a report Bentek said it "considers the 78 Bcf injection to have small risk to either side during the storage week ended July 8. The sample of storage facilities dropped 12% week on week. Both East and West regions reported lower injections while the Producing Region had a slight increase from the previous week."

Market bears will be looking for a repeat of last week's performance when a much greater injection than expected sent prices tumbling. For the period ended July 1, analysts had expected an increase in the mid-80s Bcf area, but the actual figure came in at a robust 95 Bcf. August futures dropped 8.4 cents to $4.133.

Weather forecasts continue to up the ante for above-normal temperatures in the near term. WSI Corp. in its six- to 10-day outlook shows the eastern three-fourths of the country under a large dome of above-normal temperatures bounded by South Carolina, eastern New Mexico, eastern Montana and including portions of the Great Basin. WSI says Wednesday's forecast was warmer than Tuesday's and "with the exception of Florida, above- and much-above-normal temperatures are expected to encompass the central and eastern U.S. Anomalies as warm as 8-12 degrees above normal are forecast over the Midwest and Great Lake states."

WSI cites average confidence in the forecast but admits that "temperatures may trend even warmer along the Eastern Seaboard than currently forecast. While all models have trended warmer along the Eastern Seaboard late next week, the European operational model remains the warmest of all the models."

That has analysts favoring the long side of the market. Peter Beutel of Cameron Hanover said prior to the commencement of Wednesday's trading, "Prices had trouble breaking over the median green Bollinger Band yesterday [Tuesday], and there is resistance in the $4.40-4.55 area, which should be difficult to surmount. Prices are neither overbought nor oversold here, but the market looks like it wants to move higher from here. Still, we need to be careful."

Others are outright bullish. "We are maintaining a near-term bullish trading posture as we continue to favor purchases of September futures on pullbacks to below the $4.25 level. Generally, this market is still providing a contrast between a bullish short-term demand factor and a bearish long-term supply element in the form of a continued strong production pace," said Jim Ritterbusch of Ritterbusch and Associates in a morning note to clients.

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