Unimpressed with the fact that storage refills have officially fallen below last year’s record pace, July natural gas futures values on Thursday probed support for the second day this week as the prompt-month contract recorded a low of $4.698 before closing out the day’s regular session at $4.748, down 5.6 cents from Wednesday’s finish.

July natural gas futures immediately dropped about 8 cents Thursday morning following the news from the Energy Information Administration (EIA) that 81 Bcf was injected into underground natural gas storage for the week ending June 18. The reaction was a little surprising to market watchers as the inventory build for the week was right in line with industry expectations. Going into the 10:30 a.m. EDT report, July natural gas futures were trading at $4.842, but in the minutes that immediately followed, the prompt-month contract dropped to $4.766.

As of June 18, working gas in storage stood at 2,624 Bcf, according to EIA estimates. The smallish build dropped current stocks off of last year’s record refill pace, which could be seen as bullish. However, futures traders appeared to be wearing bearish-tinted glasses Thursday morning.

“The build was nearly an exact match with the consensus expectation, but was moderately supportive compared with the 86 Bcf five-year average gain,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “Market reaction seems to be testing the idea that this report was bearish somehow, but we really don’t see it that way. The big issue remains the hurricane outlook not the weekly storage number in any event.”

Ahead of the report, Evans had been expecting an 84 Bcf build, while a Reuters survey of 27 industry players produced a 69-90 Bcf injection range with an average expectation of an 80 Bcf build. Bentek Energy was just off the bullseye with its 82 Bcf injection expectation.

In addition to being smaller than the five-year average build of 86 Bcf, the actual 81 Bcf injection came in well below last year’s date-adjusted 97 Bcf build for the similar week. Inventories are now 14 Bcf less than last year at this time, but still 309 Bcf above the five-year average of 2,315 Bcf. For the week, the East Region injected 51 Bcf while the Producing and West regions chipped in 16 Bcf and 14 Bcf, respectively.

After testing $5.190 to $5.200 resistance five consecutive trading days through this past Monday, the July natural gas futures contract has now swung a half dollar to the downside as $4.700 support has been tested two out of the last three regular trading sessions. The prompt-month contract touched $4.691 on Tuesday, followed by Thursday’s $4.698. Whether resistance or support gives up the ghost first will likely be determined by heat forecasts and storm activity in the tropics as the 2010 Atlantic hurricane season continues to ramp up.

Hurricane forecasters are still closely monitoring the disturbance currently near Jamaica. While noting that the system is still “disorganized,” AccuWeather.com meteorologist Heather Buchman said as it drifts west-northwestward across the Caribbean over the next few days, the combination of warm water temperatures and favorably weak wind shear could support development into a tropical depression or tropical storm over the southwestern Gulf of Mexico early next week.

She noted that current computer models are showing two main scenarios for where the feature will track. One scenario would bring the system over or just east of the Yucatan Peninsula this weekend, then farther north-northeast through the central or eastern Gulf of Mexico by early next week. However, the second scenario, which is favored by more models, shows the system taking a more west-northwesterly track, passing over the Yucatan Peninsula this weekend and heading across the western Gulf of Mexico toward Texas or Mexico by next week.

Like most market watchers, Credit Suisse analyst Teri Viswanath believes weather will likely steer prices this summer. “Pre-occupation with short-term weather (i.e., trading the noon-updates) will likely interject further noise around the general uptrend in prices,” she wrote in a research note Thursday afternoon. “We think that the growing [year/year] storage deficit will generally be construed by the market as constructive for prices. However, there will likely be quite a bit of noise around this trend as the market continues to focus on short-term weather developments.”

That said, a strong finish to the injection season could limit the rise in natural gas prices, according to Viswanath. “We think that the three key factors that limited storage injections last year (coal to gas switching, producer shut-ins and the early break-out of heating demand) will not be present this year. The possibility of a strong finish to the injection season will likely dampen the opportunities for an extended rally come September and October, in our view.”

Traders already long are more than willing to continue to play the market from the long side, given not only a pending Atlantic event but the likelihood of a substantive hurricane disrupting the Gulf. They have their sights on a lower buy point.

“If prices were to decline into the $4.45-4.50 zone, we would feel compelled to buy more,” said Peter Beutel, president of Cameron Hanover. “Meteorologists still seem unanimous in their call for an active hurricane season, and AccuWeather boosted its upper limit of named storms it expects to 21, from 18, this season. It also expects three to pass above the spill in the U.S. Gulf. It expects the worst tropical weather in September, when it expects eight named storms. In 160 years, only five years have had 18 or more named storms; AccuWeather expects this to be the sixth.”

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