July natural gas futures surged in a sympathetic move with crude oil and concerns of modest supply increases. July natural gas rose 22.5 cents to $12.660 and August advanced 23.3 cents to $12.749. Hyper-volatile July crude oil rocketed higher by $5.07 to $136.38.

Surging crude oil or not, traders see the natural gas market confined to a trading range, but suggest that Thursday’s EIA inventory report might be the catalyst to send prices higher or lower and out of the range. Tom Saal, in his work with the Market Profile, identified this week’s “weekly balance” for the July futures as $12.365 to $12.810. The weekly balance is established by the first two days’ trading of the week, and the methodology is to buy if market prices exceed the upper end of the weekly balance and sell if it breaks below the lower end.

The market “might break out based on the inventory number,” said Saal. By hovering within the week’s initial balance and showing little tendency to break higher or lower the market may be sending important signals as to its next move. “There is an old saying that ‘what the market is not doing is just as important as what it is doing.’ What the market is not doing is going higher,” said Saal. He added that since Friday the market has been going sideways to lower, but mostly sideways. “As long as it doesn’t take out the $12.810 [or $12.365] the market is showing a period of horizontalness.” Horizontal development or “horizontalness” is often a precursor to market moves either higher or lower.

“I wouldn’t buy the market here unless it broke out to the upside, and I would probably sell it if it broke below $12.365. Between that it’s a tough call,” said Saal.

The EIA inventory report will get close scrutiny from traders anxious to determine if any headway can be made against the supply deficit relative to last year, which currently stands at a hefty 326 Bcf. A Bloomberg survey of 18 industry observers revealed a median estimate of a 90 Bcf gain in supplies, and a similar Reuters poll showed a median 92 Bcf from a sampling of 20 analysts. Those figures will be compared to a five-year average of 98 Bcf and last year’s 97 Bcf.

If Saal’s market-based analysis is correct and prices choose to breach the lower end of the initial balance, he may have company from those who see a fundamental rationale why the natural gas market may be close to a peak.

“If the U.S. economy is slipping as fast as the numbers reflect, it is just a matter of time that the gas system will be maxed and gas prices could break sharply,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. He pointed out that gas prices in Rocky Mountain basins were backing up and “it is now trading over $5.00 under Nymex. On a trading basis we’ll continue to hold our light short positions but are closely monitoring and ‘hoping’ for a spike upwards to take a more aggressive short hedge position, most likely utilizing floors and collars,” he said in a note to clients.

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