Downward price momentum from Tuesday spilled over into trade on Wednesday as natural gas futures flirted with support in the mid $12.60s. One day before expiration, the July contract recorded a low of $12.654 before closing out the regular session at $12.753, down 25.8 cents from Tuesday’s finish.

Mild weather and regulatory uncertainty were just two of the reasons circulating Wednesday to explain the two-day combined decline of 45 cents. The drop was also supported by weakness in the neighboring crude arena. August crude shed $2.45 to finish Wednesday’s regular session at $134.55/bbl.

According to a team of Barclays Capital analysts, there does not appear to be any significant support for higher natural gas prices coming from the temperature outlook for the next few weeks. “With the number of trading days in June dwindling, the shift in market perspective changes from expectation to realization; either the warmer weather is coming or it is not,” the team wrote in a research note. “For the two-week-ahead outlook into the July 4 holiday weekend, eastern U.S. temperature trends appear near normal, contrasted by warmer-than-normal temperatures across the West. For the natural gas market, trends in eastern states (east of the Rockies) matter most; thus, there appears little impetus from near-term weather to push prices higher.”

Taking a peek at the Energy Information Administration’s (EIA) natural gas storage report for the week ended June 20, coming off the previous week’s anemic 57 Bcf build, the Barclays Group does not see any great turnaround for the bears. “The EIA storage estimate, to be released on Thursday, will reflect a cooldown in the East, probably returning the pace of injection back to ‘normal’ only, but not further into bearish territory,” they wrote.

A Reuters survey of 22 industry players produced a range of build expectations from 65 Bcf to 99 Bcf with an average injection estimate of 90 Bcf. Golden, CO-based Bentek Energy said its flow model is indicating an injection of 98 Bcf, bringing stocks 20% below the five-year high and 2.3% below the five-year average. The research and analysis firm sees a 58 Bcf build in the East region and 29 Bcf and 11 Bcf injections coming from the Producing and West regions, respectively. The number revealed Thursday morning at 10:35 a.m. EDT will also be compared to last year’s 96 Bcf injection for the week and the five-year average build of 94 Bcf.

Following Tuesday’s futures value drop, traders were mulling the likelihood of a changed regulatory environment and less supportive weather. A somewhat ominous cloud now pervades natural gas and energy trading on the whole. Some traders cited Tuesday’s 19.2-cent decline in the July contract as partly due to uncertainties regarding politics and regulation.

Congress is in the process of taking a good long look at the current markets and the effects of rampant speculation. Before the Senate Homeland Security and Governmental Affairs Committee on Tuesday, there were calls for government intervention before the futures markets become “high-stakes casinos” (see Daily GPI, June 25).

“Because of this disassociation between futures prices and the supply and demand realities in the physical markets, the futures markets are no longer able to serve the only constituency they were ever intended to service — bona fide physical hedgers,” Michael W. Masters, managing member and portfolio manager with Masters Capital Management LLC, told the committee. “If this trend continues, we can expect to see many physical commodity producers and consumers abandon the futures markets entirely as a vehicle for hedging purposes and price discovery. At that point, the futures markets’ destruction from excessive speculation will be complete.”

A New York floor trader said Wednesday there are two ideas that seem to have legs: increased margins and position limits. “The first is an increase in margins to 50% of the value of the contract. While this will institute a quick rush for the exits, the well heeled fund will adjust accordingly and probably pick up the pieces at sharply lower prices,” he said. “Then the cycle will start anew. The second trial balloon is for a restriction of trading by index funds and pension funds and probable position limits. This is a more long-lasting approach and puts the market back to a more level playing field, whereas the increase in margins to 50% will chase business offshore.

“If they raise margins, instead of 20 hedge funds, now there will be eight. That will accomplish nothing. You have made a few players bigger. They should limit positions. If you are doing business in the United States there should be a limited number of contracts you can have on. Just because there are four trading platforms, you shouldn’t be able to quadruple your trading.”

Outside of regulatory issues, weather appears to be the dominant short-term price driver. MDA EarthSat in its six- to 10-day forecast predicted lower temperatures for the Great Lakes and eastern Midwest early in the forecast period. The Atlantic Basin remains quiet.

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