July natural gas futures retreated Tuesday as traders saw the market adjusting to cash quotes and admitted that much of Monday’s 32.5-cent advance was stop-loss orders getting hit and not the result of any fundamental change in the market. July futures fell 5.3 cents to $4.129 and August dropped 7 cents to $4.312. July crude oil eased 15 cents to $70.47/bbl.

“The screen had to adjust to the cash market. Balance-of-the-month [natural gas] was $3.90. Also, the market on Monday saw a lot of buy stops go off,” said a New York floor trader. The trader acknowledged that July’s settlement above $4 put it above “one of the large [support] levels. The market has one eye on crude oil and the day’s action is not just about natural gas. If the S&Ps [stock index futures] and the crude oil are heading south, natural gas will follow it, and vice versa.”

Some analysts see the bearish case wearing out its welcome. “We feel that the $10.500 move lower from last July to the low at $3.150 discounted all of the bearish factors in this market,” said Peter Beutel of Cameron Hanover. “The recent advances are telling us that the natural gas market has internalized the bearish factors and is now trading from a clean slate. While that does not mean that we cannot have bearish factors or moves, it should mean that the surpluses against a year ago and the five-year average are done moving prices.”

Traders saw Tuesday’s decline as offering something for both the bulls and the bears. “The energies looked really strong Tuesday morning and we were attributing it to the U.S. dollar’s inability to continue its rally from Monday,” said Gene McGillian, a broker at Tradition Energy. “The markets across the energy complex surged higher, but once everything settled down and the equities turned lower, I think the natural gas market realized that it had started to reach the upper end of its trading range and changed course. The bulls can take away from Tuesday’s action that the market still managed to close above $4. It could be trying to form a base above the $4 level, but I am more inclined to believe that we are pivoting around $4 instead.

Now with attention turning to Thursday’s storage number, the market is bracing for yet another significant build. “From what we’re hearing it is expected to be a triple-digit injection for the fifth straight week, which brings up some more questions for the bulls’ case,” McGillian said. “We are hearing some reports that there will be cooling demand in the middle of the country over the next five to 10 days, but beyond that there is not any confidence from some of the forecasters about any new heat being in the eastern part of the country. Overall, fundamentals are still weak. Those bearish factors have been dominating trading for the last six to eight weeks.”

Citing EnCana Corp.’s announcement Monday that it has shut in some wells in both the United States and Canada (see Daily GPI, June 16), McGillian noted that the cause and effect of drastic rig reductions over the last few months has yet to be seen — and might not be seen for some time.

“Reduced rig levels have yet to translate into reduced supply, which is why I think that battle is still being waged,” he said. “As we look forward at the next few months and towards the end of the year we might find ourselves on a rollercoaster ride unless we get some kind of damage from a hurricane or some really cold weather because I don’t see these injection rates being dropped dramatically and we’ll likely have record levels of storage at the end of the year.”

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