September natural gas futures managed to stage a modest advance as traders cited technical studies showing the likelihood of a near-term advance, and traders sensed a market well bid at lower levels. September natural gas rose 4.7 cents to $8.773 and October futures added 3.5 cents to $8.855. September crude oil slipped 59 cents to $118.58/bbl.

Traders eyeing the market see near-term price movement as most likely to adversely affect end-users and recommend protective measures. Tom Saal of Commercial Brokerage in Miami said “$9 call options are too expensive, and $9.75 call options can be purchased for [price] insurance just like you would purchase insurance for your car or fire insurance on your building.” The $9.75 call options were trading at 15 cents; thus for $1,500 for each 10,000-MMBtu contract, a purchaser can protect himself should September futures advance above $9.75.

Saal’s belief that the market is likely to move higher is based on his study of Market Profile. The Market Profile was originally developed by legendary trader Peter Steidlmayer and applied to grain trading. Steidlmayer would plot trades as they took place in the grain pit and noted that they often formed a bell-shaped curve. His trading strategy would be to buy or sell the ends of the distribution with the idea that prices would return to the norm of the distribution.

In the longer term as the market trades and forms a bell-shaped distribution, areas of so-called “negative development” occur and act as focal points to which the market will often gravitate. Saal calls the amount of negative development above the market “unbelievable,” and points out the high prevalence of negative development below the market when it was trading much higher, and “you saw how fast we filled that [fall] in.”

“It looks like there is negative development above us at $8.775 to $9.14. If the market gets above $9.14, it might really take off, at which point $9.75 call options would start to kick in. Until time decay takes over options values will increase as prices increase,” he said. The last trading day for September natural gas options is Aug. 26.

But markets don’t move in straight lines and even if prices are to move higher, there will be pull backs along the way, continued Saal. Specifically, he points to Wednesday’s value area from $8.62 to $8.81 as a place the market will likely gravitate to as it seeks out fair value. “Especially if we open above that area Thursday, I would expect the market to come back down to test Wednesday’s ‘value’ in that range,” he said.

However, other traders expect weaker crude oil prices will weigh on natural gas. “We’ve been trading in a range for $8.65 to $8.85, and traders are just waiting to see what the [storage injection] number will be,” said a New York floor trader. He added that the market seemed to be stabilizing, but suggested a weaker oil complex may drag the natural gas lower. “I still kind of believe that the crude oil could be under further pressure for the next two to three weeks and I think that will keep the market under pressure.”

Buyers appear ready. “The market traded down to $8.33 Tuesday morning and there were buyers coming out right off the bat. The $8.50 area is pretty well bid. I’m thinking a 65 Bcf injection is already in the market. If we get anything out of the ordinary, the market should get some movement out of it,” he said.

Traders will be closely watching the 10:35 a.m. release of EIA inventory figures. A Bloomberg survey of 16 analysts showed a median 61 Bcf estimate and a similar Reuters poll of 24 industry observers revealed a median 60 Bcf build. These figures will be compared to last year’s 52 Bcf and a five-year average of 50 Bcf.

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