Despite trading within a slim 14-cent range on Monday, the day’s market direction was already labeled as ‘lower’ following a 34.5-cent decline in Sunday’s overnight Access trade session. After opening at $6.840 Monday, July natural gas put in a low of $6.790 and a high of $6.930 before closing at $6.893, down 29.2 cents from Friday’s close.

While the near-30-cent drop was a clear departure from last week’s $1+ gain, some market experts saw Monday’s action as nothing more than a break from the rally.

“I think what we saw Monday was more of a breather than anything else,” said Tim Evans, an analyst with Citigroup. “I think it is likely that prices will firm back up due to the heat that we have been seeing in a number of regions. The storage data for both last week and this week are expected to be on the bullish side as a result. Both injections could even be bullish when compared to year-on-year comparisons, so I think that will likely keep some of the sellers at bay and the shorts a little nervous in the short run.

“In some sense, Monday’s pullback was useful because it lets the high from last week get a little better established as technical resistance and makes it a little more trustworthy if we do achieve a breakout,” he added. At the peak of last week’s climb, July natural gas hit a high of $7.280 on Thursday before finishing the week Friday at $7.185.

“After jumps of 7-8% a day for a couple of days, I would be a little bit nervous about buying into further strength, so this little pullback here doesn’t really damage the intermediate term outlook,” the analyst said. “It really just allows us to evaluate the state of the trend. It is all still about weather and storage. There are just higher stakes than has typically been the case. We used to have a few storms a year and now we are braced for record storm activity. We used to worry about heat if it actually got hot and stayed hot, but now to some extent it never goes off of the agenda.” In the intermediate term, Evans said he would expect to see higher rather than lower prices.

Whether the heat will be sticking around in a number of regions remains a question mark. The Weather Channel predicts a cool front in eastern energy markets is expected to dissipate much of the warm, humid weather, and in the Midwest scattered storms are likely in Ohio, Indiana and eastern Kentucky, while only isolated convection is expected in southern Michigan, Illinois and Missouri. High temperatures will range from the cool 60s near Lake Superior to the sizzling 100s in southwest Kansas. Most of the lower Midwest will see readings in the 80s, but Missouri will suffer highs in the 90s.

Looking a little bit longer-term, Andover, MA-based WSI Corp. said Monday that July was expected to be warmer than normal throughout the country, except for the Northeast — excluding Pennsylvania and New Jersey (see related story).

Tropical cyclone formation is not anticipated over the next day or two in either the Atlantic or eastern Pacific. “In the Atlantic, clusters of showers and thunderstorms dot the area between Africa and the Windward Islands, but none of the areas shows any signs of further development,” the Weather Channel said.

Prior to Monday’s action, some traders had been viewing the rally at the end of last week as a selling opportunity, which turned out to be the right call. “On a trade basis we will hold our short winter positions and will lightly sell into this rally,” says Mike DeVooght, president DEVO Capital. He added that the driving force behind this rally was profit taking in the Btu spreads (the relatively low priced natural gas vs. higher priced petroleum products priced on a Btu basis). “There is room for these spreads to continue to tighten, but we feel rallies into the $7.5 – $8 level basis August should be sold.”

DeVooght advises traders to hold short July crude and long July natural gas spread positions; end users should stand aside; and producers should hold existing short positions of 30 to 50% of winter production at $13.95.

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