Natural gas futures market weakness continued to reign on Monday as the prompt-month contract recorded a two-month low before closing out the regular session at $4.309, down 15.8 cents from Friday’s finish.

To find a lower tick than September’s $4.263 on Monday, one would have to look all the way back to June 2, when the July contract recorded a low of $4.217. Since the June 16 high of $5.196, front-month values have now dropped 88.7 cents, or 17%.

Market watchers see a supply-demand equation that is still being largely won by the supply side. Citi Futures Perspective analyst Tim Evans said the natural gas market continues to struggle with finding support.

He noted that the decline from mid-June’s $5.200 price level has occurred despite “seven consecutive weeks of a declining year-on-five-year storage surplus,” which will likely continue thanks to continued heat in the forecasts.

“Hurricane action in the Gulf of Mexico may be needed to snap the market out of this malaise, but this also seems likely, given forecasts for an active season in the Atlantic basin and the historical seasonality that has 80% of the named storms appearing between mid August and mid October,” he said. “At some point, the current decline will prove to be a buying opportunity, in our view.”

Traders see the market as a tug-of-war between the supply bears and the weather bulls. “Without any significant weather in the near future, the increase in natural gas demand is being offset by the amount of gas coming online,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

Significant weather may be just around the corner, according to forecasters who are tracking two separate systems that could develop into tropical cyclones in the near term. The National Hurricane Center (NHC) has located a well defined low-pressure system 950 miles east of the Leeward Islands moving to the west-northwest at 10 to 15 mph. It said there was a 70% chance of it becoming a tropical cyclone in the next 48 hours. Closer to home NHC is monitoring a broad surface low over South Florida that is expected to move to the west or west-northwest at five to 10 mph. It gave the system a 20% chance of developing into a tropical cyclone within the next 48 hours.

According to meteorologist Meghan Evans, the two systems will likely compete for the next name on the 2010 Atlantic hurricane season list, which is Danielle.

“An area of low pressure heading into the eastern Gulf of Mexico by Tuesday will be watched closely for tropical development,” she said on Monday. “The low is located about 100 miles east of Florida, and it developed along a stationary front that has been draped over the western Atlantic. After drifting westward across Florida today into tonight, the low will emerge over warm water in the eastern Gulf of Mexico. The warm water and relatively weak wind shear over the Gulf will provide an opportunity on Tuesday into Wednesday for the low to develop into a named storm.”

She noted that the steering flow created by an area of high pressure dominating the Southeast could draw the system toward the central or western Gulf Coast.

Traders less concerned with hedging a physical position and more focused on the directional component of natural gas prices added a modest number of long positions and covered shorts, according to government figures. The Commodity Futures Trading Commission in its weekly Commitments of Traders Report indicated that for the five trading days ended Aug. 3, holders of long futures and options contracts (2,500 MMBtu) at IntercontinentalExchange (ICE) sold 1,816 long futures and options to bring holdings down to 235,493. Shorts declined by 6,572 to 18,563. At the New York Mercantile Exchange long futures and options (10,000 MMBtu) contracts rose by 5,190 to 145,411 and shorts fell by 6,083 to 179,610. When adjusted for contract size, long holdings on both exchanges rose by 4,736 and shorts fell by 7,736. For the five trading days ended Aug. 3, September natural gas futures fell 3.6 cents to $4.639.

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