Continuing its divergent path from the petroleum futures complex, July natural gas on Monday retreated as August crude explored north of $60/bbl. Looking at expiration at the end of business Tuesday, the natural gas prompt month traded as low as $7.12 on Monday before settling at $7.138, down 22.2 cents from Friday’s settle.

August natural gas followed suit, closing 20.9 cents lower at $7.203. Despite the weakness in natural gas — crude, heating oil and unleaded gasoline all broke higher Monday. August crude set a new record for a prompt month at $60.95/bbl before settling at $60.54, good for a 70 cent increase. July heating oil and gasoline settled 2.57 cents and 1.93 cents higher at $1.6761/gallon and $1.6750/gallon, respectively.

Weather bulls may have a tough time this week. The National Weather Service’s most recent six- to 10-day forecast shows above normal temperatures limited to areas west of a line from Midland, TX to Seattle, WA and east of a line from Detroit to Norfolk, VA. However, cities like Chicago have logged seven straight days in the 90s.

“Sure there are some hot temperatures out there, but most places have had a couple of hot days, followed by a couple of normal ones,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “That’s not going to crank up the gas demand.”

Commenting on July natural gas’ drop on Monday, Kennedy said, “July natural gas’ expiration is Tuesday, so everything has to be a little bit guarded because the only important thing left for July is who wants to make or take delivery.” The broker said he believes July will expire around $7.20 or $7.25 before August steps in as the prompt month Wednesday. “We haven’t seen any bedrock support here in August futures, so we may have some lower numbers still to come,” he added.

Despite the decline over the last couple of sessions, the broker said he still thinks the bulls are in charge. “The interesting thing is that this overall pattern still appears to be a bullish one,” Kennedy said. “While things could change over the next two or three days, I may be looking for a place to buy this damn thing.

“The market is not really giving [gas] away. With the summer strip at $7.21, give me a break,” Kennedy noted, adding that “the winter strip is currently at $8.51. Stay tuned, the next two or three days are going to set the pattern here for the next month or so.”

Coming into this week, market technicians saw the market as somewhat stretched. On Monday morning, Kennedy’s counterpart at Commercial Brokerage Corp., Tom Saal, called the market’s action on the day. The broker said the market was overbought and that July futures should test Fibonacci retracement levels of $7.16 and/or $6.76.

Fibonacci analysis is one of a broad family of analytical techniques that include the Dow theory, Elliot Wave, Retracement, and others which rely on the matching of observed price trends with predetermined cycles. In Fibonacci analysis, the key ratios are .382, and .618. Thus a 38.2% retracement of the recent May 26 low of $6.13 to the June 20 high of $7.80 would be $0.64.

Prior to Monday’s trading, Mike DeVooght of DEVO Capital suggested that those exposed to falling prices hold on to an August-October $6.50 floor at a 30 cent premium. He also suggests holding a November-March $6.25 floor at 16 cents. A floor is a risk management strategy involving the use of put options to protect against falling prices.

Now that crude oil is trading comfortably above $60, can $70 crude and $8 natural gas be far behind? Last week Phil Flynn of Alaron had some observations on the movement of markets through what can only be considered psychological thresholds.

“We saw [crude] at $20.00, at $30.00, at $40.00 and at $50.00 [and we also saw] the market’s reluctance to take out those levels the first time around,” Flynn said late last week. “Most traders say they believe[d] oil could go to $60.00. They don’t say I think oil could go to $59.99. Round numbers are what many traders strive for.”

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