The on-again off-again relationship between crude and natural gas markets was definitely back in the on-again position over the long weekend and during Monday’s regular session as a significant drop in crude futures values helped drag the August natural gas contract below pretty strong support at $3.500. Front-month natural gas futures ended up closing out the day at $3.487, down 12.8 cents from Thursday’s regular session close.

After beginning Monday’s regular session at the day’s low of $3.369, August natural gas crept to a high of $3.560 just after noon EDT before collapsing once again. Many traders attributed the recent slide in the gas market to the significant decline in near-month crude futures. Over the last week August crude has shaved 10%, or $7.44 of its value, from its $71.49/bbl close on June 29 to its $64.05/bbl close Monday. Monday’s regular session decline accounted for $2.68 of the loss alone.

Citing the “lack of physical tightness” in the crude oil market, Citi Futures Perspective analyst Tim Evans said the downside appears “wide open” for now, which is helping push natural gas futures values lower as well.

“The natural gas market is seeing a further flush to the downside in sympathy with the drop in crude oil and the equity markets, with traders who had backed off from buying late last week ahead of the long weekend still seeing no compelling reason to step in to buy,” he said. “The temperature outlook includes some warmer-than-normal temperatures over the next two weeks, but not enough cooling demand to maintain a floor under the market. The lack of current tropical storm or hurricane prospects also leaves the downside open. Prices might present a bargain at the end of the current decline and the risk versus reward parameters are shifting as the market drops, but at the moment it looks as though what is already cheap may still get cheaper.”

Even with Monday’s drop, the decline needs to be even larger if the $3.155 low for the move from April 27 is to be tested, according to ICAP’s Brian LaRose. “Only two support levels remain before the bears can say they’ve regained control, $3.365 (0.852 [retracement] of $3.155-4.575), and $3.200… A settlement below these two hurdles would strongly suggest new lows,” he said.

Despite the weakness, some analysts see hope for the bulls in Thursday’s natural gas inventory numbers. “In all cases, [last] week’s build [of 70 Bcf] was less than had been expected and less than has been customary at this time of year. As a result, the surplus declined in last week’s figures for the first time in a long time. Prices took back some of their earlier losses and, under other circumstances [the day’s 18-cent employment report-driven plunge], one might have expected a rally,” said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm. He said the Energy Information Administration storage report “might have been the first piece of bullish news in this market in quite a while. If it can be repeated, the bulls may be able to build a case for a correction of the move from $13.690 to $3.150 at some point, soon.”

However, rig count numbers reported Thursday didn’t help the bullish case. Baker Hughes reported that for the week ended July 2, the number of rigs drilling for natural gas in the United States increased by one to 688. That figure, however, is a decline of 851 from a year ago (see related story).

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