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Traders Mull Deficit Contraction, Near-Term Weather; July Called Flat

July natural gas is set to open unchanged Friday morning at $4.58 as traders attempt to balance a near-term soft weather outlook with a storage deficit still considered unable to allay concerns over winter supply. Overnight oil markets were mixed.

In spite of Thursday's 7-cent slide in the July contract, traders are maintaining a positive outlook with higher prices in sight. "The shortfall against five-year average supply narrowed by 25 Bcf in keeping alive the bearish dynamic of deficit contraction," said Jim Ritterbusch of  Ritterbusch and Associates in closing comments Thursday to clients. "The current deficit against the averages now stands at roughly 850 Bcf, a shortfall of approximately 33%. We are maintaining a view that this shortfall will need to be cut to at least below 30% before supply concerns will be alleviated. Until then, this market will remain highly reactive to any pronounced or extended hot temperature forecasts.

"Although some above-normal trends are expected along the East Coast out toward the 4th of July weekend, expected mild patterns across the mid-section of the country are currently providing an offset. All in all, [Thursday's] price action failed to alter a near-term bullish stance in which the $4.85 level still appears attainable. Any August or September long positions established today should be protected by stops below the $4.54 level on a close-only basis in referencing July futures. We would also suggest adding to fall-winter bull spreads."

If PJM power generators were reluctant to commit to incremental gas volumes for weekend and Monday generation, those mild patterns may make purchases even more doubtful. WSI Corp. in its morning outlook said, "high pressure will attempt to nose southward into the Mid-Atlantic [Friday] with partly sunny, seasonable and less humid conditions. However, another disturbance and a residual frontal boundary may bring a round of [load-killing] rain and storms across western and southern PJM today. An area of rain and embedded thunderstorms may move out of western PJM into the lower Mid-Atlantic late tonight through Saturday. More tranquil weather is expected by Sunday, though an isolated shower or storm is possible across the Appalachians and western PJM. High pressure will slide off the East Coast early next week. This will result in a southerly flow, which should result in warmer temperatures and increasing humidity levels. This warmth and a potential frontal system may lead to showers and storms over western PJM by Monday, which should spread eastward during Tuesday. Rainfall amounts may range 0.25-1+."

From a temperature perspective, "the aforementioned cold front and its associated wet weather will continue to support a cooling trend and lower humidity levels during the next two to three days. Highs may fall back into the mid 70s to mid 80s. Lows may range in the 50s and 60s. Temperatures and humidity levels may begin to trend up early next week [and] highs may warm into the 80s to near 90 and lows may range in the 60s to low 70s," the forecaster said.

In overnight Globex trading July crude oil rose 34 cents to $106.77/bbl and July RBOB gasoline fell a half cent to $3.1193/gal.

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