After posting a higher high just after the opening bell at $7.100, the September gas futures contract lost significant ground Wednesday, dropping all the way to $6.590 by early afternoon before rebounding slightly toward the end of the session. September ended the day down 9.5 cents to $6.766/MMBtu.

“I really didn’t see anything out there in terms of fundamental news to spark the market to get hammered like it did,” said Steve Blair of Rafferty Technical Research in New York. “The general response was that the locals started pounding on the market, and there was no commission-house paper in the ring on the buy side to stop it. They were able to easily push it down without too much resistance.”

He noted that volumes on the trading floor this week have been pretty light because of summer vacations. That has made it easier for locals to push the market around.

“We got down near some pretty good support numbers,” Blair noted. “We have a minor support number near $6.50. It certainly didn’t seem to me that the locals were initiating new long positions. They were getting short. That last bounce back up at the end I’m sure had a lot to do with a lot of those guys covering in some of those shorts toward the end of the day.”

Blair said if the market can penetrate the $6.50s Thursday on a larger-than-expected storage injection, it may then test support in the $6.30s.

Bentek Energy’s weekly storage prediction calls for a 30 Bcf injection into storage, including 23 Bcf in the East, 3 Bcf in the Producing and 4 Bcf in the West. That would leave working gas levels at 2,793 Bcf or about 14% above the five-year average and 6% over the five-year high. The ICAP storage options auction settled on a net injection of 30.4 Bcf Wednesday, and the Reuters survey of 20 industry participants showed an average expectation of 29 Bcf with a 5-49 Bcf range.

The National Oceanic and Atmospheric Administration said there were 78 cooling degree days last week, which was 22 fewer than the prior week and seven fewer than the same week last year but seven more than normal. Gas demand from power generation was much lower last week than during the week prior when working gas levels in storage fell for the second time this summer.

“You look at the weather outlook and the weather this week overall is not that compelling, not as impressive as some of the more intense heat spells we’ve had this summer,” noted Tim Evans of Citigroup. “But that’s not necessarily the right standard to use…in terms of the impact on storage. We are in a situation now in which even normal temperatures would probably translate into a below-average injection. I think people are now targeting a lower storage surplus at the end of the injection season. Nobody is really aiming at 3.5-3.6 Tcf anymore. They are aiming at 3.4 Tcf or maybe even below that level.

“Last week when we had a 12 Bcf draw, it was sell the news. We sold off Thursday and Friday and came in weak on Monday and Tuesday before falling again [Wednesday]. It’s nasty.” But Evans said he believes the market fundamentals are still “constructive.”

He noted there has been a 12-week decline in the storage surplus compared to the five-year average of working gas in storage. That’s likely to continue with this week’s report despite the slightly above normal temperatures last week. Furthermore, above normal temperatures are expected to continue in the West.

And there is still the hurricane season to consider. The other thing that may look ominous to some observers is the large amount of open interest. Natural gas total open interest is 944,845 compared to 542,553 on Aug. 16, 2005. Open interest is up 74% in one year even though the number of traders in the futures market hasn’t risen significantly — 223 as of the latest Commitments of Traders report compared to 209 on Aug. 9, 2005.

“There are a lot of people laying off price risk and a lot of people taking on price risk,” said Evans. “There are a whole lot of people here in the market. It looks like it’s mostly the same people as there were in the market last year, but this year they are throwing a lot more wood on the fire. I think it’s the volatility. I think it’s people looking to lay off risk on a longer term basis. In the past, I think there was more of an expectation that if you missed the see saw this time, you could get it the next time around. People don’t necessarily see it that way any more.”

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