After failing to break below support in each of the past three trading sessions, natural gas futures turned higher Tuesday as traders covered short positions on constructive weather outlooks and ahead of fresh storage data due out Thursday morning. The August contract finished at $2.863, up 7.9 cents for the session but only 0.3 cents above its $2.86 opening trade. At 105,524, estimated volume was heavy for the session.

Most traders contacted by NGI were mildly surprised by the market’s second-straight Tuesday advance. In similar fashion to the previous Tuesday, prices yesterday rebounded from a negative close Monday to open the session higher. Once the early gains were notched, the steady short-covering prevented the market from giving back any ground.

According to the latest six- to 10-day forecast released Tuesday by the National Weather Service, above normal temperatures are forecast for the entire western U.S. and extending clear across to include northern reaches of the East from the Great Lakes to Maine. That mass of hot air, however, will be in stark contrast to below normal temperatures predicted for the Southeast.

Beyond this modestly supportive weather outlook, however, the market has little constructive news in which to sink its teeth. Citing storage levels that are 16-17% higher than historical averages, Thomas Driscoll of Lehman Brothers in New York believes natural gas consumers will remain on the sidelines, waiting for lower prices. “We believe that natural gas prices are probably still too high, given the storage overhang and the lackluster demand for natural gas,” he wrote in a research note Tuesday.

“It is not clear to us how much weakness in natural gas prices is required to reach a balanced market — but we believe that demand needs to rise by an average 2.5 Bcf/day over the remainder of the refill season to prevent storage from exceeding our estimated end-of-season storage level of 3,200 Bcf,” he added. And in order for that 2.5 Bcf/day to return to the market, Driscoll estimates that prices may have to extend down to the $2.00-2.25 area.

However, Tim Evans of IFR Pegasus in New York may be shedding the bear coat he has worn for some time now. “Natural gas futures have reversed to the upside, providing further technical evidence that a bottom may have been reached, at least for now,” he wrote in a note to customers Tuesday. “Seasonally, prices often do turn higher from an oversold condition during the last half of July, as summer heat, the approach of the heart of hurricane season and commercial hedging for the coming winter all blunt the downside potential.”

In daily technicals, look for growing support associated with recent lows at $2.76-77. If breached, that level could give way to sell stops that would usher prices down to the $2.65 area in a hurry. On the upside, the market’s upward reversal through Monday’s $2.86 high gives the market its best chance at a successful correction since mid-June, but it needs to clear the $2.919 high from Friday, Evans continues. He is now long from $2.88, with a $2.74 sell stop positioned to limit his loss should the market prove him wrong.

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