With an 8.2 cent rebound on Friday to $3.218, August natural gas futures appeared to be taking their sweet time dropping below the $3 level, contrary to what many observers had expected. Although it will be extremely difficult for futures to shake the bearish trend with gas storage levels mounting at a record pace and cool weather across the Northeast, the trading activity on Friday looked suspiciously like a potential floor developing above the $3 mark, according to market analysts.

After gapping a couple cents higher to open at $3.160 Friday morning, August futures dropped to an early low of $3.125 before climbing the rest of the day and reaching a high of $3.235.

Tim Evans of Thompson Global Markets said he thinks the market has established a “rough equilibrium” with storage and cool weather in the Midwest and Northeast on one side, and the heat in Texas and a large net short position in the market by non-commercial traders on the other side.

The bearish storage trend continues to hold the most weight. The American Gas Association reported that 105 Bcf of working gas was added last week, making nine out of 10 weeks of 100+ injections with the only sub-100 Bcf week coming in at 99 Bcf. At 1,822 Bcf, working gas levels in storage are 186 Bcf higher than levels for the same period last year and 91 Bcf higher than the five-year average. The 105 Bcf injection came in about 52% higher than the same week last year, and most market watchers had expected between 90 and 105 Bcf.

“The bearish storage situation is still quite persistent, and I think we’ve got probably another increase in the year-on-year surplus to look forward to next Wednesday,” said Evans. In addition to high storage levels, the cool weather in the North looks like it will stay around for awhile.

“For the Northeast quadrant it looks like it’s going to be more of the same almost until further notice,” Smith Barney Meteorologist Jon Davis said in an interview on Friday. “We’ve got a very stable pattern right now across the U.S.: cool from Chicago to New York; heat in Oklahoma, Texas and the Rockies, but that’s it. Not much heat in California.”

The six- to 10-day forecast from the National Weather Service shows above normal temperatures in Texas and the Rockies, below normal temperatures from the Northeast south along the coastline to Florida and normal temperatures elsewhere.

The biggest thing offsetting the bearish storage trend and the cool weather is the large volume of speculative shorts in the futures market. “Although we won’t get full confirmation of that until Monday because the holiday delayed the CFTC data by a day, I think it’s safe to assume there hasn’t been a drastic rotation of positions over the course of the week and there are still significant speculative shorts riding the downtrend and they may be vulnerable to a swing to the upside,” said Evans. “Not only that, but their presence in the market also limits the amount of fresh selling that can come in. They are already maxed out.”

In the wake of the AGA report on Thursday, he noted, there was some selling but not an overwhelming volume of selling. “We failed take out Monday’s low from Access which was $3.003. There is too much psychological support there. Everybody keys off those big numbers.”

According to one other analyst the market was working off some of its oversold condition Friday by consolidating above the $3 level. “It doesn’t so far mean we’ve seen a firm floor under the market. It’s a candidate for a possible bottom, but I think from a seasonal point of view, the August contract is more likely to finish weak. I can’t with confidence say that we’ve seen all the bearish storage data that we’re going to see.

“I think that there is a better than even chance that we are going to eventually trade below $3. It’s more a question in my mind whether we need to back up, rally to $3.50 and then take a running try at [dipping below $3] as opposed to just slipping beneath the waves here. It may take several tries before we have success in either direction, really.”

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