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Technicians in Charge; Market Decline Seen as August Trades Flat

August natural gas was unchanged Monday in trading largely described as technical with little impact from forecasts continuing to call for oppressive heat throughout major energy markets. At the close August had settled flat at $4.546 and September was up 0.4 cent to $4.524. August crude oil fell $1.31 to $95.93/bbl.

"We got back up to the $4.61 level and that was a big figure for us," said John Woods, president of J. J. Woods and Associates in New York. "I think [Tuesday] will be a push down for the market; $4.61 was a significant retracement of the big move down from the $5 high [prices traded as high as $4.983 on June 9] to the recent lows [$4.064 was reached on July 7], but right about $4.60 was where we were going to stop [according to retracement methodology]. It's a technical market and that's what traders are doing."

Woods sees relatively little impact from the sweltering heat forecast to barbecue the East Coast. "There's so much supply out there and if we didn't have that, we would be $5.50 easy. This is the first real batch of weather that we have had. It's near 100 in New York City."

According to Woods, "this is pretty much a textbook technical move." And when queried about how far the market could be expected to retreat, he replied, "We are looking at a $4.50 pivot, but it could get down to the $4.30s and on an overreaction you could get back to the $4.20s. Tomorrow is their [technicians] day, and we will probably have a move on down. From $4.20 or $4.30 we'll probably go right back up again.

"I don't see the market sub $4. I think we are done with that."

Woods may not see the market under $4, but according to government reports, directional traders are at least looking for lower prices. In its weekly Commitments of Traders Report the Commodity Futures Trading Commission reported that as of July 12, managed money piled on the short side of the market and elected to reduce its long exposure.

At the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) fell 19,087 to 491,470 and short contracts increased by 6,032 to 122,483. At the New York Mercantile Exchange holders of long futures and options (10,000 MMBtu per contract) increased the number of contracts by 1,297 to 142,407 but short positions jumped by 21,155 to 243,768. When adjusted for contract size long positions at both exchanges fell by 3,475 and shorts increased by 22,663.

For the five trading days ended July 12 August futures fell 3.0 cents to $4.333.

Analysts see longer-term technical factors supporting further gains. "Prices advanced on Friday past resistance and up into overbought territory," said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm. "Prices are now above the upper, blue Bollinger Band and are overbought on daily charts. They still have room on the weekly chart and they have a lot of room on the upside on the monthly chart. We would expect a sell-off based on the technical factors on the daily chart, but the weekly and monthly charts suggest that prices could have quite a bit of upside potential longer term.

"Funds were covering shorts urgently on Friday as buying gained momentum with the latest weather reports suggesting that hot weather will be with us for a while to come. There was talk on Friday of there being a 'massive heat wave' across the central and eastern parts of the U.S. this week, Dow Jones noted. Temperatures will be brutally hot in the Midwest and Northeast by the end of this week," he said in a morning note to clients.

Massive heat wave as in 100-degree readings along the East Coast. Commodity Weather Group in its six- to 10-day forecast shows the resilient ridge of high temperatures centered over Kansas but stretching as far west as North Dakota and Wyoming, east to Connecticut and through Texas. "Strong heat surging through the Midcontinent in the coming days will take aim on the East Coast by late this week. Most areas should see very hot upper 90s to low 100s. The models are in good agreement this morning on this hot one- to five-day period, but they diverge more sharply on the six- to 10-day," said Matt Rogers, president of the firm.

"The American and European operational models cool the Midwest to near-normal temperatures, while both of their respective ensembles keep weak to moderate above-normal temperatures. We favor the hotter leaning given the expectation for residual hot ridging. The West could see a brief warm-up in the 11- to 15 [-day forecast], especially mid to late. Tropical Storm Bret will head out into the open Atlantic, causing no concern."

At 5 p.m. EDT the National Hurricane Center reported that emergent Tropical Storm Bret was 130 miles north of Great Abaco Island. It was showing winds of 65 mph and was moving to the north-northeast at 7 mph.

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