Adding to Monday’s 20-cent decline, the September natural gas futures contract continued lower Tuesday amid a mixed bag of fundamental and technical market clues. But while bears were quick to claim the 4.5-cent loss and $5.038 settle in September futures as a victory, bulls took solace in the market’s ability to hold above $5.00 and believe that level of support could be a springboard to higher levels Wednesday. At 89,466, estimated volume was heavy for the session.

After dropping nearly 20 cents to close at $5.083 Monday, it was only natural for traders to push the market lower to test psychological support at the $5.00 level Tuesday. However, the September contract dipped below the $5 level, bottoming out at $4.950 at 11:15 a.m. eastern.

After bouncing around below $5 for most of the early afternoon, a steady wave of option-expiry buying entered the gas futures pit. Also supportive Tuesday were concerns over tropical storms, with the National Hurricane Center tracking three potential tropical systems in the Atlantic and Caribbean as of press time Tuesday night. Although not one of them poses an immediate threat to natural gas assets in the Gulf of Mexico, traders are well aware that if that should change, the impact on prices would be swift.

But while the tropics were heating up as a price-constructive factor Tuesday, storage looms as a bearish cloud over the market, with expectations this week again centered on a hefty injection. Consensus estimates call for a 65-76 Bcf refill, which would exceed the year-ago build of 59 Bcf as well as the five-year average injection of 58 Bcf.

Thomas Driscoll of Lehman Brothers in New York looks for his 70 Bcf estimate to boost storage supplies to 2,336 Bcf, 380 Bcf less than last year and 161 Bcf below the five-year average. To arrive at his prediction, Driscoll has allowed for 24 Bcf of “demand destruction” last week attributable to high prices and 2 Bcf of lost demand due to the blackout.

Meanwhile, Kyle Cooper of Citigroup in Houston calls for a 66-76 Bcf injection and notes that a 73 Bcf build would exceed the five-year average refill by 25%. Looking at the mild weather forecasts for Labor Day weekend, Cooper suggests the real bearish news will come with the Sept. 11 storage report, which could feature an injection of more than 100 Bcf. He predicts season-ending inventories of 3,055 Bcf.

However, since fresh storage data is still a day out, traders will have to rely on other market information with which to base their expiration-day trading decisions Wednesday. Most market watchers favor the overall trend and believe September will receive a short-covering rally.

But Craig Coberly of GSC Energy in Atlanta does not rule out further softening and has calculated downside objectives as low as $4.89 and $4.76 (basis October futures). In the longer term, however, Coberly remains bullish and expects support at $4.76 to hold, paving the way for an extension back above the $5.39 level.

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