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NatGas Market Endures Broad Setback; August Futures Unconvincingly Expire Higher

Physical natural gas for Wednesday delivery endured a broad and pervasive decline in Tuesday's trading. Only a couple of points showed advances, and most points were off by a nickel to a dime.

The Mid-Atlantic saw double digit declines, but other eastern points were off as well. The market, on average, was lower by 7 cents. The expiring August contract traded near unchanged for most of the session until prices jumped during the last two hours, giving the appearance of last-minute short-covering. At the close, August had risen 6.1 cents to $3.808 and September was higher by 5.9 cents to $3.824. September crude oil fell 70 cents to $100.97/bbl.

Although points in the East were expected to see active near-term weather, forecasts called for maximum highs barely making it to seasonal levels. Cooling requirements for the week were also forecast to be below normal.

The National Weather Service in New York City said, "weak high pressure slowly builds offshore through Wednesday night. A frontal boundary over the western Atlantic on Thursday will gradually work west toward the coast through this weekend with multiple waves of low pressure tracking along it. Weak high pressure will then return early next week."

Temperatures barely made it to normal highs. Forecaster Wunderground.com predicted that the high in New York City of 79 Tuesday would reach 82 by Wednesday and climb further to 84 Thursday. The seasonal norm for The Big Apple is 84. Philadelphia's Tuesday high of 78 was seen advancing to 83 Wednesday and reaching 86 Thursday. The normal late-July high in Philadelphia is 83. Washington, DC's Tuesday maximum of 75 was anticipated to reach 85 Wednesday before climbing further Thursday to 88, the seasonal norm.

The National Weather Service forecast below-normal cooling requirements for the region. For the week ended Aug. 2, New York state was seen at 49 cooling degree days (CDD), eight fewer than normal, and Pennsylvania was forecast to endure 41 CDDs, or 15 fewer than normal. Maryland was predicted to see 60 CDD, or 19 below its normal tally.

Gas bound for New York City on Transco Zone 6 fell 23 cents to average $2.31 and deliveries on Tetco M-3 shed 19 cents to $2.33.

On Millennium, next-day parcels were seen at $2.29, down 12 cents, and on Iroquois Waddington next-day gas changed hands at $3.80, down 8 cents.

Marcellus points were mixed. Transco-Leidy Line shed 3 cents to $2.18, but deliveries on Tennessee Zone 4 Marcellus rose 3 cents to $2.00.

Appalachia weakened. Deliveries on Columbia Gas TCO fell 6 cents to $3.71, and parcels on Dominion South shed 11 cents to $2.20.

According to one analyst, large players in the futures market are likely to be sellers. "Not surprisingly, the emergence of early fall-like weather this month has prompted an early seasonal sell-off," said BNP's Teri Viswanath, director of natural gas commodity strategy. "Based on various market comments we've received, most institutional investors are more prone to sell into any short-term rallies as opposed to building length at these levels," she said in Tuesday morning comments to clients.

Jim Ritterbusch of Ritterbusch and Associates sees the primary price driver to be the dynamic of "deficit contraction in large chunks" and suggests that will make for a trading environment in which "failed price rallies as seen [Monday] will be developing with increasing frequency.

"Although this market saw an unusually wide trading range of more than 12 cents [Monday], it didn't stray from unchanged levels. And although downside follow-through was negligible after posting fresh eight-month lows, we are still viewing the chart picture as bearish with [Monday's] action reinforcing our expectations for a decline to the $3.60 area.

"Weekend updates to the short-term temperature views continue to favor unusually cool trends especially within the six-10 day time frame. Deviations from normal of at least 9-10 degrees were expected in some regions. And while the more extended views across next week are showing patterns closer to normal, trends still appear conducive toward some strong storage builds for at least another three EIA reports. Thursday's release should show an upswing larger than the prior week and at least double the five-year average."

He said his firm's expected 97 Bcf storage inventory increase would exceed last year by some 40 Bcf.

The expiration of the August contract was anticipated to show further contango expansion, an indication of a well if not oversupplied market, "with August possibly going off the board at more than a 2-cent discount to the September contract," Ritterbusch said.

Technical analysts offer some hope to the bulls if the market can form a "double bottom" in the $3.65 area. "Can the September contract double bottom into the 3.656-3.582-3.487 zone? If so, we will have a case for a seasonal cycle bottom and an immediate buying opportunity on our hands," said Brian LaRose, a technical analyst with United ICAP. "If not, the A=C objectives from $6.493 will be our next downside targets. (A)=(C) in percent loss targets $3.225-3.176. (A)=(C) in price loss targets $2.622-2.581."

The National Hurricane Center has identified a system of showers and thunderstorms moving to the west-northwest 1,450 miles east of the Windward Islands that it says has a 70% chance of developing into a tropical depression in the succeeding 48 hours. "The track takes the storm into the Bahamas, with questionable intensity early next week," said WeatherBELL's Joe Bastardi in a Tuesday morning report.

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