Adding to Monday’s advances, natural gas futures were higher on Tuesday as traders bid prices higher on technical bullishness and concerns over the possible formation of a tropical depression near south Florida. The September contract finished at $5.217, up 8.8 cents for the session, 18 cents for the week, and a whopping 63.7 cents off its low notched late last month.

After a fast start in June and early July with storms Bill and Claudette, hurricane season has been in the doldrums for nearly a month now. However, that may come to an end soon as conditions are favorable for a tropical depression to form to the east of the Bahamas sometime Wednesday. Traders eagerly latched on to this bullish development Tuesday and used it as a battering ram to higher price levels. At $5.26, September futures notched a new one-month prompt month Nymex high Tuesday.

However, if the market is not boosted by bullish tropical storm developments Wednesday, it will have to grope for another fundamental excuse to continue higher. A prime candidate would be positioning ahead of Thursday’s storage report, which is expected to feature a refill in the 65-75 Bcf range. And though a number in that range could be bearish since it would exceed the year-ago and five-year average analogs of 53 Bcf and 51 Bcf, that is no guarantee the market will move lower. For example, despite last week easily surpassing the year-ago and five-year average injections of 33 and 51 Bcf, the 74 Bcf refill spawned a short-covering rally that boosted September futures 34 cents in one trading session.

Also fueling the bull move have been technical considerations, which have turned up since the market formed a nice rounded bottom at the end of July, chartists agree. However, they disagree as to whether the uptick is a brief development within the confines of a downtrend or a new uptrend in the making. “Not since May have we seen this kind of push higher in defiance of a bearish storage trend,” wrote Tim Evans of IFR Pegasus in New York in a note to clients Tuesday. “That advance clearly ended in tears, as the fundamentals dictated a sell-off and….we think this rally could well meet with a similar fate.”

Tom Saal of Commercial Brokerage Corp. in Miami is also not convinced of the bull move and believes there is a premium being built into prices due to the severity of last winter. “We are wrestling with the memory of last year’s winter strip. The final settlements of the November through March contracts averaged $5.60 and there is a push to get the front month up to that level again this year. What people fail to realize is that the $5.60 strip average was achieved during an uncommonly cold winter. What is the chance we will see a repeat this year?” Saal questioned.

And although he is clearly looking for lower prices this winter, Saal is counseling his end-user customers to play it safe by purchasing call options. Specifically, he suggests buying a $6.00 call option in each of the winter months as a hedge against another winter like last winter. It may sound expensive, he continued, but at nearly $3.00 per contract for all five months, you are buying yourself price protection. If prices go lower, the options expire worthless, but you buy cheaper supply, Saal reasoned.

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