It was not a very stellar week for Nymex natural gas bulls. After notching a new, three-month high and closing the previous week in fine form, natural gas futures entered last week poised to move higher. As it turns out, however, looks can be deceiving and the July contract was hit with a wave of negative price factors last week.

Once the sell-off was in motion, technical factors came into play and helped to fuel the decline. When the dust cleared last week at Nymex, the losses were staggering. At $5.675, the July contract was up 6.9 cents for the day Friday, but down a whopping 95 cents off its June 6 high.

Although overbought conditions and technical selling were said to have put the price downdraft in motion last week, storage was the main price catalyst. Expectations for a hefty 100-110 Bcf refill were enough to convince longs to liquidate at least a portion of their positions early last week. That combined with mild weather allowed prices to move lower for the first three days of the week.

As it turns out, expectations calling for a 100-110 Bcf injection were on the low side. In its Thursday morning report, the Energy Information Administration said that storage increased by 125 Bcf to 1,324 Bcf during the week ending June 6. Combined with the 114 Bcf that was stuffed into the ground during the last week of May, the last two injection figures are the first and second largest refills in the nearly 10-year history of EIA data.

Needless to say, storage — which began the refill season at record lows — is catching up quickly. At 623 Bcf on April 11 of this year, stocks were 598 Bcf or nearly 50% less than the five-year average of 1,221 Bcf. Since then, however, the storage situation has improved, especially over the last five weeks, during which time injections have averaged 99 Bcf.

In reaction to the undeniably bearish price data, the futures market sank 60 cents or nearly 10% on Thursday alone. Prices continued lower early Friday, but reversed mid-morning as traders covered shorts ahead of the weekend. The July contract was held to a modest gain, up 6.9 cents for the day.

With weather forecasts calling for moderate to mild temperatures across much of the country through at least June 23, bears remain in control of the fundamental picture. That, coupled with the probability of another triple-digit storage report this Thursday, has brokers and analysts suggesting their clients look to sell rallies.

Tim Evans of IFR Pegasus in New York calls for another refill of 110 Bcf or more. “Although there are those assuming that [last] Thursday’s drop was overdone and that a bounce is mandatory, cooling demand for this week implied by the forecast cooling degree day accumulation does not suggest a dramatic drop in storage injections,” he wrote in a note to customers Friday.

Pointing to what he calls bearish divergence, Tom Saal of Commercial Brokerage Corp. in Miami implores his clients who are buyers to be patient. Specifically, he points to the fact that the July contract closed below its 40-day moving average Thursday and Friday as a substantial reason to fear the downside.

Craig Coberly of GSC Energy in Atlanta is somewhat less bearish than Saal, saying only that gas is at a short-term crossroads. “If gas can hold together around the $5.55-60 area early [Friday], it will be likely that over the next several days gas will move higher in a partial retracement of the decline,” he wrote Friday. And while Coberly is also bullish in the long term, he believes the near-term “partial retracement” higher will be followed by another downdraft in which prices will test down to the $5.40 area.

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