With little on either the technical or fundamental news front, natural gas futures shuffled sideways and lower yesterday, as traders weighed moderating temperatures against the potential for a bullish storage report Wednesday. At the closing bell the September contract was 4.1 cents lower at $2.999. The 12-month strip suffered only a minor setback, down 1.6-cents at $3.443.

While temperatures–both current and forecasted–are relatively mild across the U.S. right now, that was not the case a week ago when triple digit heat indexes were the norm across many Northeast and Midwest. Because that period of hot weather spans essentially the same time period as this week’s storage report, traders and market watchers are bracing for a relatively small injection figure to be released by the American Gas Association Wednesday. According to Lehman Brothers’ Thomas Driscoll, a combination of heat and tropical storm-related shut-ins will result in an estimated 65 Bcf injection, which would represent the lowest weekly refill since April. Driscoll attributes half or approximately 5-6 Bcf of the estimated reduction to Barry and half to the surprising strength of last week’s heat wave.

Taking data available from the National Weather Services’ Climate Predictions Center, Driscoll notes that the extreme heat, propelled Cooling Degree Days (CDD) to an average of 100 across the country or 25% more than normal last week (see related story). Simply put, the weather across the country averaged 79 degrees last week, 14 degrees (100 divided by 7 days) above the 65 degree base used by the NWS.

While admitting that he is on the high side of expectations, Jay Levine of Advest, Inc., looks for a 69 Bcf injection Wednesday. “The consensus is calling for a refill in the low- to mid- sixties. There are even some people looking for a number in the high 50s,” he said. And even if the market reacts bullishly to a storage report of that magnitude, Levine believes that cooling temperatures across the U.S. this week and will bring prices back into line in a hurry.

Accordingly, he continues to recommend the use of straddles about the $3.00 strike. By simultaneously selling $3.00 puts and calls right now, you can take in premium of about 28 cents, he said. Maybe the market floats down, and maybe it pops up, but as long as September stays around $3.00 you are looking good.

If past performance is any indication of future results, this is not a bad strategy. The September contract has closed within plus or minus four cents of $3.00 in the last seven sessions. The average price of those seven settlement prices? Yep, you guessed it- $3.00 on the nose.

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