After recording strong gains in August natural gas futures on Wednesday and Thursday, traders on Friday finished the week off with a 26-cent drop to $6.446, which is 21.6 cents below the previous Friday’s close.

The August contract saw a little bit of everything during the week. After recording a new low for the move on Wednesday of $6.240, the prompt-month contract rebounded to notch a $6.730 trade only a day later. Traders also rode along as a close-to-expectations storage build Thursday actually produced a rally.

“Friday was a corrective action in my opinion. The industry was expecting a 65 Bcf storage injection for the week ended July 13 and we ended up getting that injection, but the market rallied on it,” said Steve Blair, a broker with Rafferty Technical Research in New York. “I think we may have overdone the upside with the 50-cent bounce late in the week, so the market corrected lower Friday.”

The broker pointed out that the market of late has been making dramatic moves with fairly significant lag times. “It took the market forever to finally come to its senses back when it was way up trading at $7.500,” he said. “Now it has accounted for the whole storage picture and dropped down into the $6.500 range. We are now playing back and forth around this $6.500 area. Once we got down in the $6.20s, we bounced 50 cents, but I think that was just a combination of some short-covering and maybe some traders taking a shot at buying the lows. The thing to keep in mind here is that the funds are still major-league short, so that situation should be monitored. The funds will likely hold on to their shorts until we get something in the way of a storm down in the tropics. As soon as a storm threatens the Gulf of Mexico, the market is going to take a pretty good run higher.”

Blair emphasized that timing in the market, as well as the season, are key to being on the right side of a trade. “Ultimately in a summer market — especially now that we are getting toward August when storms become more likely — there is much more potential to get a run-up in futures prices of a larger magnitude rather than a drop. If we get a really intensive heat wave in the Northeast and Midwest or we get something tropical that the market thinks has a potential of getting into the Gulf, then watch out.”

Prior to Friday’s trading, some technical analysts saw natural gas futures on the cusp of a significant rally with the mid-$7 area in sight. Walter Zimmerman of United Energy called August’s 17.8-cent advance to $6.706 Thursday an indication that prices have little room to fall, and he cited $6.700 as a key technical level.

“Thursday’s trend was bottoming with $6.700 key closing basis resistance as the 0.236 retracement of the entire $8.230 to $6.226 decline. We noted that a decisive close above $6.700 will suggest that a multi-week-long bear market correction of the entire $8.230 to $6.226 decline has begun and we cited $7.000 and $7.465 as the next two likely steps higher as the 0.382 and 0.618 retracements,” he said.

Tropical activity is beginning to stir. On Friday afternoon the National Hurricane Center noted that “disorganized cloudiness and showers” extending from Puerto Rico northeastward into the Atlantic for several hundred miles are “associated with a tropical wave” and an upper-level low. However, the government agency noted that upper-level winds are currently not favorable for development, but could become so over the next couple of days.

Joe Bastardi of AccuWeather observed that although the only real Atlantic storm so far this season was Barry (see Daily GPI, June 4), conditions are improving for storm development. He said the warmth of the water near the U.S., especially in the Gulf of Mexico, suggests that if storms are not numerous, they can be intense.

Bastardi and other meteorologists use weather analogs in the preparation of their forecasts. He added, “One only need do the work to look at the past to see the similarities, and then look at the major changes in the [wind] shearing pattern, for instance, to see the path we are currently on. The clock is ticking.”

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