Despite overbought conditions and a market that many felt could go no higher, natural gas futures defied gravity yet again Monday, as bulls rebounded strongly from a lackluster morning sell-off. With that the September contract achieved a new three-and-a-half-month high, gaining 13 cents to close at $3.617. Estimated volume was light to moderate at 93,696.

Many traders came into the week sensing that the market could turn on a dime and rescind at least a portion of last week’s gains. By 11:15 a.m. that move appeared to be in the works as sellers pressed the September contract down to the mid-$3.40s. The feeling was that if prices broke beneath Friday’s low at $3.46, a full correction would ensue. As it turns out, however, the requisite selling did not exist, prompting weak short sellers to cover their positions throughout the rest of the trading day.

At $3.63, September’s high is almost a dollar above its $2.64 low notched on Aug. 7. On Monday, several traders took a moment to reflect on the conditions that brought about that 37.5% increase. “We have seen some exceptional summer heat,” said a Washington DC-based broker. “That, combined with small storage injections relative to last year, and a decline in production, has given this market the boost it needed to move higher.”

However, fundamentals are not the only factors that have pointed to higher prices over the past couple months. Also at work are technical factors, analysts agree. “We are seeing some very constructive indicators that have yet to turn bearish,” the DC-based broker continued. “The five-day moving average is still well above the 30-day and the September contract has not closed in the lower half of its daily range in some time,” he said, adding that Stochastics continue to point higher.

Tom Saal and Ed Kennedy of Pioneer Futures in Miami agree and have been consulting their end-use clients that the “2” in front of the decimal point may not be available for some time. “Look for a test of the $3.80-86 area in the near future…. Buyers be ready to lock in prices on any sell-off,” they wrote in a daily note to customers.

Looking ahead at the fundamental picture, traders will need to weigh the impact of moderating weather, versus the possibility of another bullish storage release Thursday. Taking into account his forecast of weakening “weather normalized” injection rates, Thomas Driscoll of Lehman Brothers has ratcheted down his 50 Bcf prediction to 40 Bcf. A year ago the market injected a hefty 74 and the five-year average injection is 58 bcf, he said.

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