Despite record temperatures in a number of regions around the country, August natural gas futures on Tuesday maintained the momentum lower from Monday’s trading session. The prompt month put in a low of $5.520 on the day before settling at $5.555, down 22.8 cents on the day and 79.2 cents lower for the week-to-date.

Even as tensions in the Middle East remained high, crude futures also dropped significantly Tuesday, closing at $73.54/bbl, down $1.76. One broker noted that while violence continues, traders may have realized that oil flows haven’t been affected yet. “Everyone is still pumping oil,” said Tom Saal, a broker with Commercial Brokerage Corp. “I think the market is finally digesting that and realizing that this premium is not warranted.”

Turning to natural gas, Saal said he wasn’t surprised by the sell-off, but was caught a little bit off guard by the size of the sell-off. “Given the heat wave, I was little baffled with the amount of sell-off over the last two days,” he said. “However, I really think the market has totally discounted this weather because it is not permanent. When the forecast came out over the weekend that this was only a few-day event and that things were to return to normal, I think traders took the premium out of it. Now if we get another hot forecast or a storm threatening the Gulf of Mexico, things will change once again. These are the things the market is hinging on.”

The broker added that there may be a little more left to the downside yet. “Because we settled near the low on Tuesday, my guess is we will trade lower on Wednesday,” Saal said. “The old low is $5.47 not including Access trading and $5.39 with Access, so those would be the two targets to the downside.”

Saal said it is also interesting to look at the cash market. “The backwardization we are seeing — cash prices being over futures — is normally associated with storage withdrawals, not injections,” he said. “During the summertime, backwardization normally cues at least a slowdown in storage injections. So next week’s injection number, which will come out on the futures expiration, might surprise people with how low it is. Backwardization gives people the incentive to pull out now and replace it with lower cost gas next month. That is not necessarily a bearish scenario because it is telling the market that during the peak of the summertime that there is not enough gas. It’s telling people we need to pull gas away from injections for use. If we get a longer term run it could change the mood of the market.”

Students of the natural gas futures market using the Market Profile pioneered by legendary Chicago grain trader Peter Steidlmayer see the market trading lower then higher. Saal, in his analysis of Market Profile, suggested following Monday’s 56.4-cent price plunge that August futures should test a “failed auction” target of $5.640 to $5.650 but then rise to a “value area” of $5.730 to $6.063 followed by a subsequent rise to $6.200 to $6.344.

When Steidlmayer originally developed the Market Profile he applied it to grain trading. Steidlmayer would plot trades as they took place in the grain pit and noted that they often formed a bell shaped curve. His trading strategy would be to buy or sell the ends of the distribution with the idea that prices would return to the norm of the distribution.

Violence continues in the Mideast. Overnight Monday into Tuesday, Israel continued to bombard southern Beirut and Hezbollah continued to fire rockets into northern Israel, several of which landed in the city of Haifa.

Top traders see the instability affecting petroleum and by extension natural gas markets, but “both fundamental and technical indictors continue to weigh heavily in favor of lower prices, especially with the gas market losing the price prop of exceptional strong demand from the electrical generation sector,” said Jim Ritterbusch of Ritterbusch and Associates. He noted that current hot temperatures are now supporting cash prices at a premium to the nearby screen but this situation is expected to reverse later in the week amidst a cooling trend across the Midcontinent.

On the tropical weather front, AccuWeather reports that the reason there has been so little activity is that unfavorable conditions exist in the Atlantic. Tropical waves have been parading across the Atlantic, but strong winds over the region are inhibiting waves from developing into tropical storms, the forecaster said.

Later Tuesday afternoon, Tropical Storm Beryl formed off the coast of North Carolina. The storm was expected to drift closer to the coastline as the week progresses.

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