After September natural gas futures ventured north of $7 for the third consecutive session on the news that Gulf of Mexico oil and gas producers could be faced with a hurricane Thursday and another next week, the bulls were once again unable to sustain their gains as the contract dropped in the afternoon to close at $6.864, down 7.6 cents on the day.

The industry on Wednesday was focusing on the very real possibility that Tropical Storms Dean and Erin could become the first two hurricanes of the 2007 Atlantic hurricane season as early as Thursday. Erin, which was targeting a South Texas landfall sometime Thursday, had at least one producer shutting in production and evacuating personnel as a precaution (see related story). Dean, which forecasters said has the better chance of reaching hurricane classification, was still east of the Lesser Antilles island chain and was expected to be on the Gulf’s radar sometime next week as a hurricane.

The prevailing theory from market watchers is that Erin will be pretty much a nonevent, while Dean could wreak some havoc if the storm finds its way into the Gulf. Citigroup analyst Tim Evans said Erin is not really a concern for the markets. “Even though there have been some platforms evacuated related to Erin, it really is not that big of a deal. The chance for significant damage is relatively slight, while the chance that those platforms will be repopulated by Friday and resuming production is very good.”

However, the analyst allowed that Dean is a whole different story. While making it clear that speculation about Dean’s path while the storm was so far out in the Atlantic was the equivalent of throwing darts blindfolded, Evans allowed that Dean could be a market mover. “When Dean puts the northern Gulf of Mexico in its sights, that’s bullish for the natural gas futures market,” he told NGI. “However, if Dean moves its target off that region, then that bullishness is gone, just like that. The situation warrants monitoring, but I think we have a few days before the path comes into better focus.”

Joe Bastardi of sees Dean as “a developing situation.” He said “it will be a major threat once it gets to the Caribbean and is a threat to the Gulf Coast. The GFS [weather model] is now in a fairly consistent mode that makes some sense and seems to be now taking over as the most reliable of models with this.”

However, some short-term traders aren’t impressed with the two storms. “It looks like the market is struggling at these levels,” said a New York floor trader. “The market could run 25 cents to the upside one more time, but from here it looks like there will be a lot of scale-up selling,” he said.

Commenting on the futures market’s failure to break above and stay above the psychological $7 price level, Evans said he sees the $7.170 to $7.220 area as really the next resistance line in the sand. “That area corresponds with some prior daily highs from late June, so I think that becomes the next decision point in terms of price.”

Taking a look at the storage report Thursday morning for the week ended Aug. 10, Evans said there is a fairly wide range of expectations. “I am looking for a 30 Bcf injection, but I have heard a lot of calls for a build in the 19 to 22 Bcf range. I have also heard a few people who seem to think we will see a withdrawal, so there are a lot of different views due to the severity of last week’s heat,” he said. “While a low injection would be constructive to the market, we still have an awful lot of gas around, so I don’t view the storage numbers as all that compelling at this point. The market could currently absorb two or three weeks of bullish storage numbers and not care. However, the market will not be able to shake off the tropical storm or hurricane threat as easily. A constructive storage argument is a case for $7 prices and a significant hurricane threat is the case for $8 prices.”

According to the Energy Information Administration (EIA), 30 Bcf was injected last year for the week, while a 57 Bcf build is the five-year average. A Reuters survey of 21 players expects an average injection of 22 Bcf to be revealed when the EIA releases its latest report Thursday at 10:30 a.m. EDT.

©Copyright 2007Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.