The July gas futures contract slid 19.6 cents lower on Monday to $6.314, succumbing to overbought conditions, pressure from strong gas storage injections, a declining storage deficit and normal temperatures across most of the nation.

After opening at $6.41, a dime lower than Friday’s close, the near-month contract managed to reach a daily high of $6.500, before an afternoon reversal ensured sending July cascading down to end the day 1.4 cents off its low. The contract posted a lower high and a lower low for the day compared to Friday.

“The natural gas market finally looks like it may have discovered a limit to its buying potential, as the recent advance looks like it is faltering relative top the ongoing strong performance in the petroleum complex,” said IFR Pegasus futures analyst Tim Evans.

He said the $6.22-6.25 area that has been limiting the downside should be the critical level to watch. “Failure to hold there could imperil both the $6.06 uptrend support and the $6.00 psychological support, raising questions as to the durability of the $5.85 low from back on May 29.”

Cynthia Kase of Kase and Co. agreed that there is a slight chance that prices will break down this week and slip below $6. If that happens, she looks for a target no lower than $5.58.

However, Kase said the chances are greater that support will hold above $6 and prices will rebound. “More likely, a price of roughly $6.18 should hold; in which case a recovery should ensue thereafter,” she said, predicting that prices would continue to climb after that reversal. The market still would be in danger of correcting sharply lower again, however. Kase warned clients on Friday that the market has entered “a zone of instability.”

“Even though there is immediate resistance at $6.80, the key challenge comes at roughly $6.91. Prices could surge above this level to better than $7.00 or even the $7.15 area, and as long as there was not a sustained close above $6.91, we would expect that the risk of a sever correction would still remain. If the week closed above $6.91 or it closed over nominally $7.15 for a couple of days, then we would expect a continued rise to roughly $7.50.” Above that, she said the next target would be $8.40.

In order for those levels to be reached, however, traders will have to weigh the impact of another potentially large weekly gas storage injection and a continuing decline in the storage deficit.

Analyst Stephen Smith of Stephen Smith Energy Associates noted in his weekly report to clients that with normal weather the weekly storage injection rate could surprise a lot of people. He calculates that the cold in May and June masked a significant potential increase in weekly storage injections. Smith is expecting a 106 Bcf weekly injection this week, which is within the broader range of market expectations of 95-110 Bcf.

A 106 Bcf weekly injection would put working gas levels at 1,305 Bcf, or about 737 Bcf lower than the extremely high working levels at the same time last year (2,042 Bcf). Working gas levels at this time last year were the highest they had ever been in EIA’s 10 year history of data.

If EIA reports a 106 Bcf injection this week, working gas levels will be higher than they were on June 7, 1996 (1,251 Bcf), and only 138 Bcf lower than they were on June 6, 1997. The average working gas level for the same week over the five years prior to last year was about 1,650 Bcf.

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