While August natural gas futures on Friday were unable to maintain Thursday’s rally, the prompt month was able to hold on to most of its gains. August closed down 1.8 cents at $6.134 while September futures dropped less than a penny to settle at $6.191.

August futures on Friday started with a continuation of Thursday’s rally, reaching a high on the day of $6.19, before spinning lower for the rest of the day.

“We had an initial rally as a little follow-through from yesterday [Thursday],” said Tom Saal of Miami-based Commercial Brokerage Corp. “Then we had a consolidation, which looks a little on the bullish side. The pattern for the past few days looks like a textbook bull flag on a 30-minute chart. Bull flags in natural gas are pretty reliable, especially if you see it on a 30-or 60-minute chart.

“We will probably test something north of $6.22 early next week,” he added. “Whether we stay there or not is another story altogether. If you look at where the market closes on a daily, weekly, or even a minute chart, if it closes near the high for the period, you usually try to test that high next.” Saal noted that it doesn’t always work, but it is not a bad place to start.

“There’s not a lot of weather, except for out West, so fundamentally the only thing you can say is the cash price is below the first-of-the-month index. As long as it’s below, then there’s always the chance that you might gravitate back towards the index.”

As for Thursday’s run-up, Saal pointed to fund activity. “A week ago, the funds held a pretty good net short position. On Thursday, the funds came back and bought back their short positions. When the funds come into the market it’s like a herd of elephants.”

According to the latest Commitments of Traders Report released Friday by the Commodity Futures Trading Commission, non-commercial fund traders increased their net short holding nearly 7,000 positions to 22,349 as of July 20. And as the funds got short, the commercial traders got long, noted Saal.

Who should we believe? “I like to focus on the funds,” said Saal. “They are more predictable because they are purely profit-motivated and their time horizon can be as short as a couple of days.” Saal continued by noting that Thursday’s 22.1-cent rally was fueled by non-commercial fund buying. “They look for technical or fundamental stimulus that thwarts the downward momentum and quickly buy back their shorts.”

If prices don’t move higher this week on the wings of fund short-covering, they will likely turn back lower amid mild weather and further fund short accumulation, Saal said. A quick look at NGI‘s database of non-commercial open interest positions (see https://intelligencepress.com/data/cot/cot_table.epl?code=023651) suggests the latter scenario is more likely. In each of the last three instances (April 2001, July 2002 and July 2003) when non-commercial traders have extended their short holdings to the 20,000 mark, they have not stopped there. Instead, these speculative traders continued to add to their shorts and, in each case, extended past the 30,000 net short threshold, driving prices lower.

Craig Coberly of GSC Energy in Atlanta said, “Gas is giving me a larger corrective ‘bounce’ than I expected. However, as long as the price remains below $6.50, I’ll continue to believe the intermediate-term trend is down. To totally invalidate my bearish outlook, gas would have to close above 6.50.”

The Energy Information Administration (EIA) reported a storage build of 72 bcf for the week ended July 16, falling short of last year’s 77 Bcf injection, but surpassing the 69 Bcf five-year average. The injection also fell way short of the 109 Bcf and 108 Bcf injections from the prior two weeks. Industry analysts whose predictions were almost entirely out of the money were in shock (see related story). The consensus of prognosticators had centered around a mid-80s Bcf build.

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