July futures retreated Wednesday as traders booked gains and viewed current price levels as selling opportunities. Traders, however, see market psychology as having changed to one of buying on weakness. At the close July dropped 3.7 cents to $4.629 and August shed 3.3 cents to $4.667. July crude oil tumbled $2.41 to $100.29/bbl.

“We are basically back in the $4.60 area that has been targeted as a good sell spot. We put in a high today of $4.68 and those guys that wisely bought the dip are taking their gains. I have been seeing outright selling,” said Eric Bentley, CEO of VKNG Energy LLC, New York.

“The heat is here and that’s why I think natural gas is catching a bid. It settled over some important technical levels at $4.60. It will also be psychologically supported at $4.50, and if it were to jump to $4.85, you would see some big offers up there.” He added that the modest weather event off the coast of Florida caught some traders’ attention and “the opinion forward is ‘look to buy dips.’ $4.34 is the mother of all support.”

Although Wednesday’s modest dip wasn’t exactly in their script, bulls couldn’t be more pleased that the first day of the 2011 Atlantic hurricane season started right on cue with a small area of low pressure forming off the east coast of Florida. Forecasters at Colorado State University (CSU) said they expect that system signals the opening of six months of above-average tropical storm activity.

The CSU forecast team, known as the CSU Tropical Meteorology Project, is forecasting 16 named storms forming in the Atlantic Basin by Nov. 30, with nine turning into hurricanes, five of them major hurricanes (Category 3 or higher). A combination of expected neutral El Nino Southern Oscillation conditions and favorable atmospheric and oceanic conditions in the tropical Atlantic will be the major factors determining hurricane production, they said. (see related story).

Coincidentally at 2 p.m. EDT the National Hurricane Center (NHC) reported it was watching a small area of low pressure east of Daytona Beach, FL moving to the west-southwest at 20 mph. It gave the system less than a 20% chance of becoming a tropical cyclone in the next 48 hours. NHC also noted an area of disorganized cloudiness and showers over the west-central Caribbean. It said gradual development was possible as the system was expected to remain stationary. It said it had only a 10% chance of developing into a tropical cyclone in the next 48 hours.

As if an early announcement that the hurricane season was present and accounted for was not enough to keep traders occupied, Thursday’s 10:30 a.m. EDT report by the Energy Information Administration (EIA) covering natural gas inventories should keep traders and analysts busy trying to assess the implications of the only real-time supply-demand information the industry has.

Last year 90 Bcf was injected and the five-year average stands at 99 Bcf, according to EIA figures. Expectations for Thursday’s report are an average 95 Bcf from a Reuters sample of 21 traders and analysts. The range of the sample was 85 Bcf to 110 Bcf. Houston-based IAF Advisors calculates an 88 Bcf build and Ritterbusch and Associates is looking for a gain of 95 Bcf also.

Analysts who couldn’t find any particular fundamental reason for a continuation of Tuesday’s 15-cent advance were at least partially vindicated with Wednesday’s soft performance. “The natural gas market has rallied to the highest level since the beginning of May, but as was the case with that prior advance, we see the market as lacking any clear fundamental premise for an immediate extension of the recent push higher,” said Tim Evans of Citi Futures Perspective. “Seasonally, there may be some anticipation that the onset of the summer cooling season or the June 1 start of the official hurricane season might be a reason to test the upside, but we continue to see the ‘near-average’ storage as a fundamental status quo in the weeks ahead.”

Evans is ready to concede that last Thursday’s stout 105 Bcf injection “may not have been enough to cap the futures market, but this larger-than-expected refill warned that the supply-demand balance was possibly weakening. We think it could weaken further, too, since the overall nuclear power plant operating rate remains lower than is typical with the industry at just 80% of capacity on Tuesday. This was an improvement from the 67% rate of early May, but this trend toward higher nuclear output (and possibly reduced utility demand for natural gas) has further to run.”

Evans is looking for a build in this week’s inventory report of 99 Bcf.

It’s a tale of two temperature patterns, according to the six- to 10-day forecast by the National Weather Service. Within a broad ridge bounded by northern New York, eastern Colorado, southern New Mexico and northern Florida above-normal temperatures are forecast, but west of the Continental Divide lower temperatures are generally expected.

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