A little unsure of its footing following Monday’s 30-cent-plus rise, June natural gas futures explored higher and lower levels on Tuesday before settling nearly unchanged at $6.258, down 1.8 cents on the day.

While the market continued to digest the National Oceanic and Atmospheric Administration’s bullish hurricane forecast (see Daily GPI, May 23) a week before the official start of the Atlantic hurricane season, traders were trying to separate hype from reality.

“I think the market was trying to see whether Monday’s action was for real or not…and I guess the jury is still out,” said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. “There was symmetry on Tuesday where the market rallied up, got buried and finished near unchanged on the day. Trading on the day ended up being kind of a wash.”

With the Friday expiration of June natural gas rapidly approaching, Saal said the petroleum inventory reports Wednesday and the natural gas storage report Thursday should be closely watched. “The American Petroleum Institute’s petroleum stocks report should be watched closely as we now have crude futures on another charge higher here.” July crude — in its first day as front-month — soared $1.80 on Tuesday to close at $71.76/bbl.

Commenting on the natural gas futures rally on Monday, Saal said even though NOAA’s updated hurricane forecast was similar to its original February forecast, the news is more relevant now because the traditional hurricane season begins in a week. “The threat is more imminent now,” Saal said. “Every time the mainstream media covered the forecast on Monday, they showed images of the New Orleans devastation.”

As for picking a trading strategy for the remainder of the week, Saal said it is hard to call because of all of the noise. “I could paint a couple of pictures here. Is the heat here to stay? How worried are people about hurricanes? Are we going to have a big storage injection Thursday? These are all questions that could change the market,” Saal said. “We have been trending lower, so there is bound to be some short-covering, which is exactly what we saw Monday. The wave of short-covering was news-generated or just traders having to get out of their contracts before Friday’s expiration. You also have to remember we are trading June natural gas. There were two tropical storms last year during the month.”

Overall, Saal said he thinks the $5.86 from last week could finally be the low for the move. “Personally, I think we have already made the lows,” he said. “I was bullish at GasMart in Denver [May 5] and I am still bullish… When the market was trading lower it was perceiving that the chamber of commerce weather that much of the country was experiencing over the last month or so was going to continue right up into November when snow would fly. People are convinced we are going to fill storage and be choking on natural gas, but the market needs to remember that things change. There are a number of things that can happen this summer from hot weather, hurricanes and nuclear outages to droughts. There are a number of things that could change the natural gas complex’s dynamics right quick.”

Monday’s meteoric advance has some traders seeing nothing more than an inaugural phase of the hurricane season, but market technicians suggest some prime trading opportunities.

“Monday was a hurricane notification rally short-covering squeeze,” said a New York fund trader. He added that the action in the front months was short covering from funds, spreads, and traders who had rolled short positions Friday into July and had to exit. “Traders were noticing that this time last year the market put in its lows prior to the weather and hurricane driven advances and Monday the NOAA hurricane report came out. After last year’s hurricane activity everyone is looking for cover,” he said.

NOAA’s report cited 13 to 16 named storms, eight to 10 hurricanes, and four to six storms of Category 3 or higher expected for the Atlantic Basin this season. Forecasts can often go awry. Last year there were 27 named storms, yet NOAA forecast 12 to 15.

More fundamental traders see a market low at the $6 level, but also suggest a short-term selling opportunity. “We continue to have difficulty building a scenario for sustained nearby futures values below the $6.00 mark given our belief that the bearish supply side news has been largely discounted,” said Jim Ritterbusch of Ritterbusch and Associates. He noted that further price gains toward the $6.50 area basis June cannot be ruled out prior to Friday’s expiration. “However, we would view such an advance as a selling opportunity in the July contract, preferably at around the $6.75 level.”

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