August natural gas wasted no time in making its mark Monday on the futures market in its first regular session action as the front-month contract, shedding 16.1 cents to close at $3.944 as the fear premium associated with a possible storm in the Gulf of Mexico over the weekend fully dissipated.

The July contract ran up 10.5 cents in its Friday expiration in anticipation of a potential hurricane forming in the Gulf by Monday. When that did not happen, traders resumed their normal positions. More importantly, Monday’s $3.944 close thrust the front-month contract back below the all-important $4 price point and within half a penny of the $3.949 termination of the July contract.

“The August contract decided to immediately play with $4, which has been a key price level in the past,” said Steve Blair, a broker with Rafferty Technical Research in New York. “As for Monday’s drop on the whole, I think it was purely storm speculation leaving the market. A lot of the late rally Friday had to do with the report that a system could cross the Yucatan Peninsula and turn into a Category One hurricane. No one wanted to get caught short ahead of that, but we came in Monday morning and there was nothing to see, so we backed off that premium.

“While the system turned into a nonevent, it very well could have changed the mindset of the market as it reminded everyone that we’re in the midst of yet another Atlantic hurricane season,” he added. “People are definitely thinking about it now.”

Blair noted that he would be surprised to see much more downside in the weeks ahead. “In my opinion the downside is limited because things are already so bearish. How much more weak could things get from here? The more pressing potential definitely lies to the upside as the market faces heat waves and possible hurricanes. The market has proven it doesn’t really care very much about how large the storage overhang over last year and the five-year average are. This is why I’m not sure we’ll see $3.500 gas again. Every time we test it, we bounce right back, so I think we would surely bounce again, but I don’t even think we’ll get there.”

Blair said he sees the storage injection pace dropping off in the weeks ahead. “It’s getting pretty warm in a number of large gas usage regions, so I think the power generation demand is likely in the process of coming in as people fire up their air conditioners. That should keep the injection closer to historical comparisons, which will keep the current storage overhangs from blowing out any more.”

Some analysts see prices grinding lower this week. “We fully expect to see prices drop at some point this week, with the commonly accepted reason being ‘abundant stocks and poor demand,’ a combination of factors that was used (and we believe should have been largely discounted) to justify the decline in prices from $13.690 to $3.150. At some point, and we believe we should have reached it by now, that argument becomes used up,” said Peter Beutel of Cameron Hanover, a Connecticut-based energy consulting firm.

When prices were conspicuously trending lower, traders noted that sell stops would build up below major chart points, and if further selling continued, the sell stops would trigger additional selling, thereby perpetuating the downtrend. That dynamic seems to have flip-flopped. “Prices have major resistance overhead at $4.105, $4.253 and $4.387,” said Beutel. He added that the top level of near-term resistance is at $4.690/MMBtu. Each increment of price has selling and is then “topped” by buy stops, which if triggered will represent fresh buying. Beutel puts the next major price target at the 2009 year-to-date level, which is now at $4.139/MMBtu.

Although the National Hurricane Center reports that there are no active tropical cyclones at this time, meteorologists are keeping a wary eye on the Gulf of Mexico. said an area of low pressure is moving slowly northward through the eastern Gulf of Mexico. “Although this feature has not yet developed into a tropical depression or tropical storm, there is still plenty of time for development to take place,” said meteorologist Eric Wanenchak.

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