A natural gas market eager to see whether last week’s breakout to the upside was warranted or a bout of overzealous exuberance received confirmation of the former on Monday as the July natural gas futures contract tested resistance at $5 for a second consecutive session before closing out the day at $4.916, up 11.9 cents from Friday’s regular session finish.

The prompt-month contract, which left its $3.800 to $4.500 trading range last week for the first time in three months, reached a high of $4.944 on Monday, about three cents below the move’s $4.977 high from last Friday.

While bulls attribute the recent run-up to the official start of the hurricane season, which is expected to be very active, warmer-than-normal temperatures in some regions of the country and concerns on the Gulf of Mexico and shale regulatory fronts due to recent accidents, many traders and analysts alike still don’t see fundamentals capable of supporting recent gains.

Developments over the weekend, including a relatively quiet current Atlantic Basin and a temperature outlook with near five-year average projected degree day accumulations suggest there is no particular fresh fundamental support for prices, said Tim Evans, an analyst with Citi Futures Perspective in New York. “This suggests that the market debate will center around whether last week’s price adjustment was too much or too little.”

Rafferty Technical Research broker Steve Blair said the market does not seem to care about the storage fundamentals. “What we are seeing is a technical breakout. Once we broke above the $3.800 to $4.500 trading range, $5 became our next resistance target. If we do get through $5, there is not a whole lot in the way on a technical basis between us and $6.”

Blair said he also believes the market is factoring in the beginning of the hurricane season, hotter weather and the recent mishaps in the Gulf of Mexico and onshore. “Uncertainty on Gulf drilling after the Deepwater Horizon catastrophe has only been compounded by the EOG well blowout last week in the Marcellus Shale,” he said. “Now, there are a lot of questions about offshore and onshore, so supply could be in for a bumpy ride. In my opinion shale gas was largely responsible for putting storage over the top.”

The Pennsylvania Department of Environmental Protection (DEP) on Monday ordered EOG Resources Inc. to suspend all of its natural gas well drilling activities in the state following the blowout last week in Clearfield County, PA (see related story).

Analysts are hard pressed to explain last week’s 45.6-cent rise in the July futures in the context of a change in market fundamentals. “It is difficult to point to a fundamental factor to explain the rally. We feel that the rally is more technical and position adjusting in nature rather than a major fundamental shift,” said Mike DeVooght, president of DEVO Capital, a Colorado trading and risk management firm.

DeVooght pointed out that for the past year, “two popular trades have been to buy the complex — sell natural gas and buy the back month gas — sell the spot. Because these trades have been working so well and for so long, when traders come in to unwind these positions it can create a tremendous amount of volatility in the front three to four contracts. Exaggerating the current volatility is positioning in front of the upcoming hurricane season and the kickoff of air conditioning season. Hurricane and weather-driven rallies tend to be short in duration but can be uncomfortable for the shorts, especially the speculators. On a trading basis, we will hold our current short positions. We will look at increasing and extending our short hedge positions on rallies above the $5.50 level (basis the spot) [and] will hold our long call speculative positions. If we should spike up to $5.50, we will book profits on our speculative positions.”

Market bulls may not be able to count on much more fund short-covering. The recent strength in the futures has brought short and long positions including futures and options into close alignment. For the five days ended June 1 the Commodity Futures Trading Commission in its weekly Commitments of Traders Report showed a reduction in both long and short natural gas positions by “managed money”, i.e., pure directional traders. On the IntercontinentalExchange long futures and options (2,500 MMBtu) held by managed money fell 38,728 contracts to 321,358 and shorts fell by 2,194 to 50,048. At the New York Mercantile Exchange longs rose by 1,872 to 142,020 contracts (10,000 MMBtu) and shorts fell by 4,813 to 212,456. When adjusted for contract size combined longs fell by 7,810 and shorts fell by 5,361 contracts. For the five trading days ended June 1, July futures rose 13.4 cents to $4.248.

Total long positions and short positions on both exchanges are nearly balanced. After adjusting for contract size, long futures and options are 223,359, and shorts are 224,968.

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