August futures were able to manage their first higher daily high in six trading sessions and posted an 8.4-cent gain on the day to reach $3.201 at the end of the truncated holiday trading session at Nymex. The increase was expected by many observers as a continuation of the technical correction this week, but, it is less certain where the market goes from here. Bearish fundamentals abound, but technicals indicate the rally could continue into the mid-$3s.

“I wouldn’t be surprised if we gapped down on the open Thursday,” said Jay Levine of Hartford, CT-based Advest Inc., a subsidiary of The MONY Group Inc. (Advest’s parent company was incorrectly reported in Tuesday’s edition). “I think we have a possibility of at least 5 cents. If one were very aggressive, he would sell any rally that enters this market, being cognizant that a rally is overdue. If you continue to sell the rallies, you’re probably going to make money if you’re a speculator.”

Tim Evans of Thompson Global Markets said it’s equally likely that this market will gap to the upside and the technical rally will continue. “I think today’s little upswing here doesn’t really guarantee us an upside follow-through. It’s a little break in the gloom. Things look to have stabilized a little bit. But I don’t expect a gap down. It’s possible, but we closed closer to the high for the day. A gap higher is possible. None of that would really drastically alter the intermediate term landscape. We’ve still got bearish storage data, more coming Thursday and probably at least one more report after that. We need some intense heat, some hurricanes, something bigger than what we’ve seen so far to reverse the bearish storage trend. Until we do that, we can manage rallies, but they are in the nature of upward technical corrections, and they probably aren’t going to be that large in magnitude.”

Evan said even if this market were to kick up into the $3.40-$3.50 area, that would still be true. It wouldn’t really change the larger context of the market. However, if August was to reach $3.75, there could be a change in perceptions. “We’ve got some pretty important failed support on the August contract at $3.75. I would really expect to see that level kill a rally at least on the first try.”

A marketer noted that there also were rallies in the second weeks of April and May. “There’s no time pressure. We’ve been oversold, plunging into expiration each month. It leaves us space where a rally is possible.”

The Commitments of Traders report from last week confirmed that there’s a lot of non-commercial fund short positions in the market, so that could provide some fuel for a short-covering rally. It’s not the classic setup, however, with the commercials on the opposite side of the market from the funds. The commercials are flat right now.

“I wonder if these fund managers really plan to hold these short positions right into the teeth of hurricane season and right into the run-up to heating season,” said another analyst. “Even if the commercials don’t defend a level like $3, it seems to me that if you were a fund manager with $2 to $2.50 in profit, you would realize there’s not another large chunk of profit on the downside? Are they going to risk a rally of 50-70 cents to get that last half dollar to the downside. It might make sense for a portion of their position, but probably not all of it.”

When the market reaches certain objectives on the upside or downside, speculators usually take profits and scale back their positions. According to some observers, that time could be coming. “You could justify taking profits just on the idea that $3 may not be the bottom, but it’s close enough for government work,” the analyst added.

Nevertheless, the storage situation shows no signs of changing. The American Gas Association storage report is coming out today and it’s likely to show another large injection.(the last eight weeks have seen the following weekly refills: + 102 Bcf, + 108, + 106, + 118, + 99, + 117, + 105, and + 108 Bcf last week). The range of expectations this week has been as broad as 85 to 120 Bcf, but most see something between 90 and 105. “My guess is 107 Bcf,” said Levine. He added that if these record refills continue, there’s a good chance storage will reach 2.9 to 3 Tcf by Nov. 1, which increases the likelihood that prices will return to the low $2s.

“This thing is going to be temporarily range bound, maybe to $3.60 and down to $3,” said Levine. He sees initial support in the $3.10-$3.13 range, followed by $3.

A heat wave is expected to continue this week for many areas west of the Rocky Mountains. The National Weather Service’s six- to 10-day forecast also shows above normal temperatures in the Gulf Coast region. Meanwhile, very cool weather from the Great Lakes states into the Northeast and New England will keep cooling needs low throughout the eastern half of the country.

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