With a worsening technical environment and weather forecasts becoming less supportive, the August natural gas futures contract continued its recent plunge on Tuesday, dropping to a low of $5.830 before closing the day’s regular session at $5.863, down 17.6 cents from Monday’s close. In the three sessions since last Thursday’s $6.706 settle, the prompt month has spiraled 84.3 cents.

While the contract recorded a small bounce off the day’s low, this down move could still threaten to breach the $5.740 prompt-month low recorded back on Dec. 27, 2006. If that occurs, the next support-zone price of $5.590 dates back to Oct. 13, 2006.

“I can’t say that I am surprised that this market has finally come to the realization that we have an incredible amount of natural gas in storage,” said Steve Blair, a broker with Rafferty Technical Research in New York. “The maxim of the day is: ‘What took the market so long to figure out where it should be?’ Barring a surprise, the storage report from the Energy Information Administration [EIA] Thursday morning will confirm that current inventory has bumped above year-ago levels.”

Blair noted that the industry appears to be expecting an injection in the 70s Bcf for the week ended July 20. According to EIA date-adjusted data, only 2 Bcf was injected into underground storage last year for the week and the 2,692 Bcf in storage as of July 13 was only 63 Bcf below last year’s 2,755 Bcf level. “We likely have a couple more good injections ahead in the coming weeks, so if this week’s report allows current stocks to eclipse last year’s level, then the surplus will likely continue to grow and grow unless something drastically changes with the weather.

“While I fully expected that a lack of heat or storms would allow this market to come to reality, I didn’t expect it was going to drop $1 over a few trading sessions. The funds are pretty short this market, so this move lower could be the funds piling on more short positions. However, I would not be surprised to see this market get back near $6 in the near term because we came down so much so quickly, but overall, the market should continue to stay weak until supportive news arrives in the form of heat or storms.”

Prior to Tuesday’s session, market technicians pointed out the importance of the $6 area if the current free-fall in natural gas prices was somehow going to be averted. Walter Zimmerman of United Energy noted that $6.000 to $5.960 is “the 0.618 retracement of the entire $4.050 to $9.050 advance” and contended that “a decisive close below the $5.960 level opens room down to the $5.120 to $4.920 zone as the 0.7862 retracement of the $4.050 to $9.050 advance.” The $4.050 to $9.050 advance was staged between September and late November 2006.

Many students of the market, such as Zimmerman, believe that matching observed price trends with predetermined cycles can be used for market timing and price projection. In this case the late 2006 advance of gas futures is being studied for “retracements” of that advance, or just how far down can futures fall, and still be “retracing” that advance without becoming a full bear market.

“It is reverse higher or else time…with the ‘or else’ being a continued decline to the $5.000 area,” said Zimmerman.

Weather forecasts have changed such that warm temperatures forecast this week for the East have now slipped to seasonal. “The big picture theme could be characterized as same to cooler for the Eastern U.S. Chicago slips to just outside the above-normal area and warm anomalies in the western Midwest are not as strong as seen [Monday],” said MDA EarthSat meteorologist Matt Rogers. He added that “all the model versions agree with keeping the eastern Midwest and nearly all of the East Coast cities in the normal category.”

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