Natural gas futures gave up almost all of Tuesday’s gains and settled stoutly lower Wednesday in active trading on the New York Mercantile Exchange. The floor was abuzz with talk of the August contract moving sharply lower, and one set of estimates surfaced that put Thursday’s expected storage addition ahead of long-term averages.

August futures dropped 14.6 cents to $3.283 and September skidded 13.8 cents to $3.433. August crude oil rose $2.02 to $61.54/bbl buoyed by a seemingly supportive inventory report.

“It was the black-box algorithmic traders Tuesday and the fundamental traders today,” said a New York floor trader. He added that traders were “lined up” to sell contracts Wednesday as “there is talk that the August contract is going to test below $3.”

Perhaps not $3, but some see $3.20. “Today’s downside decoupling from the strong oil and equity markets reinforced our bearish inclinations and expectations for a further decline to the $3.20 area,” said Jim Ritterbusch of Ritterbusch and Associates. It was his observation that the release of June industrial production figures by the Federal Reserve “may have jump-started today’s selling, [but] we are continuing to emphasize the temperature outlook as the primary price driver of lower gas prices.”

“We will be maintaining a bearish view while at the same time, suggesting acceptance of profits on further declines to the $3.20 level or lower,” he said in an afternoon note to clients.

The Federal Reserve reported that industrial production fell 0.4% in June, better than May’s 1.1% decline and also better than market expectations of a 0.7% fall.

Quantitative traders who rely on pattern recognition nailed Wednesday’s market fall but have been struggling with longer-term market movements. They reported that their shorter-term models predicted a rise above $3.50 but admitted that their longer-term programs only recently confirmed the entrenched downtrend. “For the first time in a while our [longer-term] models were actually bearish. Prior to last week all the market downturns had produced only neutral signals,” said a Texas trader.

On a short-term basis, however, the model did call for a price correction when $3.25 was reached, and “I didn’t think we would see the price levels we reached Tuesday, and the number the model targeted was just above $3.50.”

“If the model is correct, once we reach $3.50 we should see a continued slide lower. The model works on a one- to three-day time frame,” he said after the close of trading Tuesday. In Wednesday’s trading August futures traded as high as $3.525 in electronic Globex trading before beginning its protracted slide to settle near the day’s low.

Models or not, fundamental traders will be taking a close look at Thursday’s release of storage data by the Energy Information Administration. Expectations center around the five-year average build of 88 Bcf; a Reuters poll of 23 analysts revealed an expected 87 Bcf injection, but a Bloomberg survey showed a median 92 Bcf from a sampling of 12 industry traders and analysts.

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