August natural gas futures continued their three-week-plus decline on Monday as the prompt-month contract continues to zero in on the low for the move of $3.155 set back on April 27. The contract put in a low of $3.225 in Monday morning trading before closing out the day’s regular session at $3.263, down 11 cents from Friday’s finish.

While feeding off its weak fundamentals, the most recent decline in natural gas futures has been helped along by significant weakness in crude markets. August crude dropped another 20 cents Monday to close at $59.69/bbl. Since the $71.49/bbl close on June 29, August crude has lost $11.80, or 17% of its value.

“The natural gas market also remains vulnerable on the downside in the near term, with the ongoing weakness in petroleum prices helping to weigh on sentiment, but with the weather outlook also leaving the downside window open for now,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “The temperature outlook is relatively mixed, with only moderate cooling demand overall, and the tropical Atlantic is quiet for now, with no tropical storms in sight. Hurricane risk will pick up for August and September, so we could be setting up for a short-covering rally if a storm does track through the Gulf of Mexico, but the market remains vulnerable on the downside for now.” said Monday that while a few tropical waves had formed over the weekend, nothing imminent was on the radar.

“We sure look like we are going to test out that $3.155 low from late April,” said Steve Blair, a broker with Rafferty Technical Research in New York. “Where we go from there is the question. I think $3 to $3.050 is a pretty strong pivot point. Below that we start approaching that 17-year-old trend line down between $2.500 and $2.750. The last time we hit $2.500 gas was 1992, so I’d say it is a pretty major trend line.”

Blair added that crude values were definitely playing a part. “I certainly think crude weakness is helping us lower a bit, but I also think the fact that UNG [the United States Natural Gas fund] has run out of units to issue has also helped natural gas futures to scout lower prices,” he told NGI. The fund, which is holds a significant front-month natural gas futures position, ran out of units to issue last week (see Daily GPI, July 10). Much speculation has circulated over the last number of weeks as to what UNG’s impact on prices is.

Other traders continue to cite the familiar list of drivers pushing the market lower. “The combination of more than adequate storage, a weak U.S. economy and the lack of any significant weather-related demand is taking its toll on the gas market,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. He said rig activity was “plummeting,” but he is not looking for any significant drop in production any time soon. “On a trading basis, we will hold current short positions,” he said in a morning note to clients.

Oil services giant Baker Hughes reported Friday that the number of rigs looking for natural gas fell by 16 to 672 for the week ended July 10. It is down 872 from a year ago and is the lowest tally since May 2002.

DeVooght recommended that trading accounts and end-users stand aside, but producers were counseled to hold an October $4.50-6.00 collar, and also a 12-month $5.00-8.00 collar (buying $5 put option, selling $8 call option) beginning in August 2010 for 35 cents.

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