Trading inside the range established on Wednesday and Thursday, natural gas futures checked mostly sideways Friday as light short covering ahead of the weekend was met with an almost equal amount of overhead selling. The July contract finished at $3.93, up 1.6 cents on the day, but down 10.3 cents for the week.

Following five months of harmonious agreement, fundamental and technical forces started to point in opposite directions last week. Record-setting storage injections and the first year-on-year storage surplus in more than a year continue to point convincingly to lower prices. According to the American Gas Association, 99 Bcf was injected into underground storage facilities for the week ending May 24, bringing total working gas to 39% full at 1,281 Bcf. Heading into the report, traders were well aware that an injection greater than 92 Bcf would result in a flip-flop from a year-on-year deficit to a year-on-year surplus. Storage now stands 7 Bcf more than year ago levels and just 27 Bcf less than the five-year average.

Looking ahead, the storage picture remains bearish. Early expectations for this Wednesday’s report are centered on a 90-100 Bcf injection, which if realized, would easily surpass last year’s 78 Bcf figure. The comparable five-year average injection is 91 Bcf. Despite lower prices, demand for natural gas has not yet begun to recover, according to a report by Thomas Driscoll of Lehman Brothers. In a report issued last Wednesday, Driscoll estimated the lost demand for the first eight weeks of the traditional injection season to be 6.7 Bcf/d vs. last year and 2.7 Bcf/d vs. the prior four years. Accordingly, he predicts the American Gas Association will announce a 90 Bcf refill this Wednesday, which will bring the year-on-year storage surplus to 19 Bcf and help in fermenting the bears’ case.

However, technical signals may have their own ideas on the direction of prices. While natural gas futures have formed a classic downtrend formation since peaking at just north of $10 at the end of December, they are showing signs of bottoming, according to several astute market watchers.

“We completed a textbook reversal pattern last week,” said Tom Saal of Miami-based Pioneer Futures. “We set a new low for the move on Wednesday and then were able to rally to close above the settles from the prior two days. The confirmation has come since then, based on the market’s inability to retest that low. This could be the excuse technical traders were looking for to cover shorts and/or initiate new longs,” he reasoned.

He may have a point. According to the latest Commitments of Traders report from issued Friday by the Commodities Futures Trading Commission, non-commercial traders had already begun to cover their shorts. In fact, as of Tuesday of last week as they reduced their net short holdings 11% from 27,303 to 24,081 in just a week.

“This latest COT report is very revealing,” continued Saal. “Funds are trend followers. When they start to cover their shorts, the market has a tendency to go higher.”

In daily technicals July has support at prior lows of $3.78 and $3.67, according to Tim Evans of New York-based IFR Pegasus. On the upside, selling is seen first the $4.01 high from the regular open-outcry sessions Wednesday and Thursday, followed by the $4.075 high from Wednesday’s Access trading session. Evans currently holds a 50% long position in July from $3.94 with a sell stop at $3.76 to limit his risk. If stopped out, he will try the upside again with a $4.03 buy stop.

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