Tropical Storm Bertha, which made landfall in southeastern Louisiana Monday morning before being downgraded to a tropical depression, had no impact on production and provided no impetus for the September natural gas futures contract to stage a rally. Instead, September plunged sharply lower at the open and proceeded to bust through prior support in the high $2.70s before resting at $2.678 at the end of the day, the lowest level on the spot continuation chart since the first week in March.

Several observers attributed to price weakness to the drop in temperatures this week, while others still wondered why last week’s heat was unable to produce a market rally.

“If you want to look at this decline as a reaction to the break in the weather this week, there’s really not much there,” said Tim Evans of IFR Pegasus, who noted the cool-down will last only a few days before temperatures return to the low 90s. “That’s a very superficial look at why we are 18 cents lower than we were on Friday. I think you have to go back to the big picture, which is just that storage is awfully high, and maybe add in a little bit that the [speculative] funds are still inclined to sell it.”

The Commitment of Traders report by the Commodity Futures Trading Commission showed that as of July 30 the reportable non-commercials (the funds) held a 26,905 net short position in the market. That compares to a peak short position of more than 62,643 in January when prices reached a low of $1.85.

“It’s clear they are willing and able to commit more to the short side of it, and that’s partly what’s driving it down here,” said Evans. On the downside, he said, the September contract has entered “something of a no-man’s land, which stretches down to failed resistance in the $2.47-55 span.” He said if those levels are broken, longer-term buying probably will kick in around $2.30-38, followed by psychological support at $2, the low from January at $1.85, and then the bottom from last September at $1.76.

As is usually the case, a lot is riding on this week’s storage report. Jay Levine of Advest Inc. wasn’t expecting September to break through the $2.70 level, but now he’s even more confident it won’t make it lower than $2.67.

“I think this is an important level,” he said. “I personally think that any buys anywhere near here will pay off by the time the contract goes off the board, if not quite a bit sooner. I think any sell-off will be met with good buying going into the report.” Levine said he believes the market sold off Monday because many have been conditioned over the past two weeks of heat to expect a large storage injection in spite of the hot weather.

“The market two weeks in a row has been disappointed with a higher than expected number,” he said. “It’s discounting the injection this week. Many do not expect a low number. If we get something in the 30s [Bcf], this market will be hot and heavy early and right back into the $2.80s if not $2.90s. If you get something in the 40s, I think, we’ll still be up in the $2.70s and $2.80s, but it will be more of a muted rally. If we get [an injection] in the 50s, I think you may see prices into the $2.50s and we may even see that beforehand.” If September does drop to the low $2.50s and doesn’t hold, Levine sees the next level of support in the mid $2.20s.

Evans is expecting the storage report on Thursday to be a bullish event, with an injection of 20-40 Bcf. He noted that the cooling degree day accumulations on an air conditioning-weighted basis, show last week was the hottest week since the week ending July 31, 1999. It also almost certainly limited the amount of gas available to be injected into storage. In addition, there were high cash price spikes last week in the Northeast, particularly in New York, which created an incentive to withdraw gas from storage rather than inject.

Lehman Brothers analyst Thomas Driscoll said last week that he is expecting a 50 Bcf injection in this week’s EIA report compared to a 60 Bcf injection in last week’s report and a 75 Bcf injection during the same week last year, according to EIA. Levine said he’s heard estimates mainly in the 40-60 Bcf range, and he expects a 49 Bcf injection.

“Last week’s heat took a lot of gas away from injections, but the market has been ignoring bullish news lately,” noted Evans. “I question whether the market will be able to keep that up. We’ll only have a short break this week in the heat. It’s hurricane season, and we just had a tropical storm reminder in the Gulf. In addition, we have a big slug of speculative short positions already in this market. It’s not a ‘short it and forget about it’ kind of market. This thing could snap back in a fairly ugly fashion on really very little news. When the speculators run out of ammunition, I don’t think they will be at $2. I think we’ll find a floor long before that.”

The National Weather Service’s latest six- to 10-day forecast calls for above normal temperatures to continue in the Northeast and to stretch from the Pacific Northwest down the coast and across the Southwest and most of Texas to the Gulf of Mexico and across to Florida. Normal temperatures are expected for the bulk of the United States, with below normal temperatures confined to the northern Rockies and part of the northern Plains states.

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