July natural gas futures retreated on Tuesday as the market shrugged off a day on the calendar that bulls in the recent past have used to start a rally. The prompt-month contract dropped 9.3 cents Tuesday to close at $4.248.

With June 1 marking the first day of the 2010 Atlantic hurricane season, traders in the past have looked to the upside as they anticipate the potential fallout from hurricanes entering the Gulf of Mexico production area over the next few months. Two years ago the July 2008 futures contract jumped 26.6 cents from $11.703 on Friday, May 30 to $11.969 on Monday, June 2. Similarly, a year later the July 2009 contract increased 41.4 cents from $3.835 on May 29 to $4.249 on June 1.

The disconnect this year could have something to do with the declining importance that Gulf of Mexico natural gas has in the domestic supply equation. With the development of new drilling technology unlocking onshore reserves around the country in places like the Marcellus, Barnett, Woodford and Appalachian shales, a hurricane cutting off Gulf supply is not as critical since increased onshore supplies and high storage levels would mitigate any losses from Gulf production. In addition, the liquefied natural gas buildout in the United States over the last 10 years opened additional supply avenues, especially in a pinch.

Some market watchers found simpler answers for Tuesday’s decline, noting that they are not quite ready to write the Gulf off as a key to U.S. natural gas supply.

“Looking purely at the prompt-month contract’s rise last week, which included the switch from June to July futures, front-month futures values increased 30.6 cents, so a pullback was expected any time now,” said a New York trader. “Over the last few months we’ve been bouncing up and down around the $4 price level, so when we reached a high of $4.431 Tuesday, it set off another pullback. Sure, the market normally records a symbolic gain to kick-off the hurricane season, but it just didn’t happen this time. However, I think the reason it didn’t happen this year is more due to the recent price action than any discounting of the Gulf’s contribution to the nation’s supply. We do still need the Gulf.”

Citi Futures Perspective analyst Tim Evans noted that while trading began Tuesday with a certain “supportive buzz tied to the start of the 2010 Atlantic hurricane season,” he sees the market as “vulnerable to renewed weakness” without a specific storm threat or a supportive storage trend.

Some top traders don’t see an immediate end to the oversupply/weather anticipation conundrum. “Forecasts for warmer weather are helping support the market, but overall, the market has been trading in the same range since mid-March,” noted Mike DeVooght, president of DEVO Capital Management. “Support and buying comes in below $4 and resistance above $4.30. The large amount of gas in storage has been keeping the buyers on the side, but anticipation of increased demand seems to underpin prices. On a trading basis, we continue to hold our current positions.”

DeVooght has a bullish bias to the market for trading accounts. He suggests holding on to October $4.50 calls purchased for 38-45 cents, but for end-users he counsels standing aside. Those with exposure to falling prices should hold on to the remainder of a 12-month $5.50 put offset by a short 12-month $7.50 call that was initiated in December.

Weather anticipation may have its limits in the eyes of traders focused on the directional movement of natural gas prices and less concerned with offsetting the risk of a physical position. According to data from the Commodity Futures Trading Commission (CFTC), for the week ended May 25 managed money exited the long side of the natural gas market and added new shorts.

In its weekly Commitments of Traders report the CFTC reported that nearly three times as many long positions were liquidated as new shorts were initiated in its managed money segment. At IntercontinentalExchange long futures and options positions (2,500 MMBtu) rose by 5,529 to 360,086 and shorts increased 1,834 to 52,242. At the New York Mercantile Exchange long futures and options (10,000 MMBtu) declined by 15,098 to 140,148 and shorts rose by 4,809 to 217,269 contracts. When adjusted for contract size long futures and options on both exchanges fell by 13,716, but shorts increased by 5,267. For the five trading days ended May 25, July futures fell 32.2 cents to $4.114.

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