The divide in energy markets continued to widen Monday as natural gas futures continued to plummet while crude futures remained firm, leaving some traders to tilt their heads even farther sideways in confusion. The August natural gas contract dropped to a low of $6.320 before inching higher to settle at $6.376, down 28.6 cents on the day.

The $6.320 low was a penny under last Thursday’s low mark, which was considered by some traders to be a bottoming move. After rallying to a $6.720 high last Friday, Monday’s free fall would appear to be leaving the door open to still lower prices, especially without any sustained heat or storms to back up a potential rally.

The crude/natural gas comparison has also been an interesting indicator. While natural gas futures prices are at a six-month low, crude futures prices are at an 11-month high. On Monday, August crude gained 22 cents to $74.15/bbl after reaching a high of $74.50/bbl on the day. The last time front-month crude traded this high was back on Aug. 11, 2006, when the Sept. 2006 contract reached $74.55/bbl. The last time natural gas futures traded lower than Monday’s $6.320 low was back on Jan. 18, when the February contract reached a low of $6.150.

“If this trend continues, crude is going to $100 and natural gas is going to…ZERO,” quipped Jay Levine, a broker with enerjay LLC. He noted that the fall in natural gas futures prices is being mostly attributed to the lack of weather, noting that without an increase in demand there’s an increase in supply, thereby making for a decrease in price. “It’s rarely so cut and dry — and I can almost assure you (which is NOT any guarantee) that’s it’s not always going to be like this — but that’s the gist of it,” Levine said. “Extreme heat is one thing but it’s going to take extreme widespread and sustained heat plus a little outside help (i.e., a hurricane or two; very likely before long) to turn things around and I’m not so sure natural gas won’t respond accordingly even before such occurrences.

“I feel the majority of the current weakness is close to running its course,” he added, noting “that doesn’t mean we’ve seen the bottom in natural but it does mean the bottom probably isn’t that far off — and if it is, it’s not likely to remain there for long.”

Other top traders agree that the current downtrend may be coming to an end, and although the natural gas market is currently ignoring the strength in the petroleum sector, it may be just a matter of time before prices advance.

“It seems that at some point in the near future we could get some type of news that is bullish, which could create a sharp upward spike in the gas market,” said veteran trader Mike DeVooght of DEVO Capital. He posited that such a rise “might not last long and it should be a selling opportunity, but if you are short at these levels and at this time you should be prepared for a short-covering rally.”

Some market bulls are ready for the short-covering rally to begin. Phil Flynn of Alaron said, “We’re long August natural gas from approximately $6.400 with a stop loss at $6.100.”

DeVooght takes the approach that should August trade above $6.750, “we will book our short position for the balance of the summer. We will hold our light winter short position,” he said in a note to clients. Prior to Monday’s session, DeVooght counseled end-users and traders to stand aside, but physical market longs, such as producers, should continue to hold a short August-October strip at $8 for 25% of production, hold an additional summer strip short at $7.600 for 50% of production and continue to hold a short winter 2007-2008 position at $9 for 15% of production.

The short-term weather outlook is a tale of two temperature patterns. The National Weather Service in its six- to 10-day outlook shows a broad area west of a line extending from northern Michigan to southwest New Mexico enduring above-normal temperatures. Only western Oregon and Washington are spared. East of a line extending from East Texas to northern Maine is forecast to enjoy below-normal temperatures.

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