July natural gas is set to open 5 cents higher Tuesday morning at $2.22 as traders see large speculative holdings reconsidering their portfolio of short positions and the first heat wave of the season makes its debut. Overnight oil markets were mixed.

Mike DeVooght, president of DEVO Capital Management, isn’t ready to enter the market yet, but he feels it is primed for a realignment as funds and managed accounts jettison the short side.

“[T]he nearby contracts settled lower on the week, while the deferreds were up. We have seen this pattern over the past few months. The spot and cash market has been weak, while the deferreds have been steadily working higher, [and] part of the strength can be attributed to the buying in anticipation of a hot summer and partly by short-covering.

“The funds, who have been carrying a substantial short position for quite some time, seem to be throwing in the towel. It continues to be difficult to make a bullish fundamental case for natural gas, but we feel the gas market is ripe for a good old-fashioned short-covering rally. What will spark the rally is difficult to say. It could be a protracted heat wave or possibly the funds decide to get out of their short positions and get long. On a trading basis, we will continue to stand aside and await future developments,” he said in a weekend note to clients.

Analysts expect California demand to be higher as triple-digit temperatures are forecast. “Prior to the long holiday weekend, the forecast was showing some heat moving into the West this week. As we gather ourselves for a new month, the forecast seems to be holding true as Sacramento is looking at triple digits most of the week, while Burbank will be getting warmer as we get deeper into the week,” said EnergyGPS, a Portland, OR-based risk management and power consulting firm in a Tuesday morning report to clients.

“On the supply side, in-state wind has shifted down and will continue to stay low while imports from other parts of the West will be hard to come by as their respective regions are warming up as well. This will push up on the overall implied heat rates and initiate more natural gas-fired generators to turn on to help balance the grid.”

Tom Saal, vice president at FCStone Latin America LLC, in his work with Market Profile sees rangebound pricing for now. He expects the market to test last week’s value area at $2.175 to $2.135.

In overnight Globex trading July crude oil rose 27 cents to $49.60/bbl and July RBOB gasoline fell a penny to $1.6232/gal.