September natural gas meandered lower Tuesday as traders are being forced to recognize a cooler temperature environment, but technicians see the market holding critical support for the time being. September fell 9.2 cents to $3.932 and October slid 9.7 cents to $3.942. September crude oil dropped $1.23 to $86.65/bbl.

“The natural gas market has once again retreated below $4.00/MMBtu as the warmer-than-normal temperatures in the forecast have failed to impress and tropical wave 93L has become more disorganized and now looks as though it will track somewhat further to the south rather than curling toward the north and into the Gulf of Mexico,” said Tim Evans of Citi Futures Perspective in New York. “A hurricane in the Gulf of Mexico is about the only upside risk for natural gas over the next six weeks or so. While prices are weaker today [Tuesday], we should also add that prices may be chopping sideways on moderate volume as opposed to doing anything more dynamic.”

Students of market psychology note that bullish sentiment readings often correlate well with intermediate-term market bottoms, and current readings fall right into that pattern. Walter Zimmermann of United-ICAP tallied bullish sentiment data from Market Vane and noted that bullish sentiment for the natural gas market reached a near-term low on Aug. 8 of 18% when September traded as low as $3.855, not far from Tuesday’s settlement.

Bulls can take heart in that low readings in recent years have been met by a substantive price advance. In September 2009 natural gas futures rose from $2.409 when bullish sentiment was at 17% and prices again advanced from the low of $3.810 of March 2010 when bullish sentiment was a lean 19%. Once again in October 2010 the market registered a bullish sentiment of just 17% when prices slumped to $3.212 but subsequently rallied.

At present technicians are watching closely to see if the $3.855 low on Aug. 8 will hold as support and enable the market to move higher. “We had noted in last week’s report that, just having dipped below 20% bulls, natgas had reached a bearish enough sentiment extreme to sustain a rebound,” said Zimmermann.

“Last week gave a bullish piercing pattern on the weekly candlestick. And from a successful test of key support. Our most bullish case support was $3.889 as 0.618 of the $3.212 to 4.983 rally. That level held. This suggests room up to the next 0.618 at $4.550.”

Other analysts see the market attempting to factor in forecasts of cooler temperatures and higher production. According to Jim Ritterbusch of Ritterbusch and Associates, traders are “still attempting to discount an expected temperature cool-down across the eastern half of the country next week that appears capable of sharply curtailing demand within the [power generation] sector. The market has also been forced to tweak its production estimates across this year as a result of a couple of sizable increases in gas-directed drilling rigs.

“While we always caution against reading too much into one or two week’s data, we will also note that the trend in gas-directed rigs has been leveling during the past three to four months following a well defined downtrend extending back to last August. In short, many forecasts are beginning to look similar to that of the EIA [Energy Information Administration] where year-over-year production increases of more than 5.5% are becoming more widespread.”

Forecasters see hot weather confined mostly to Texas and Oklahoma. In its six- to 10-day forecast Commodity Weather Group of Bethesda, MD, said, “The most common spot for hot weather over the next two weeks is the western U.S. (especially interior) and the South-Central U.S. (especially Texas/Oklahoma). The rest of the Deep South should lean to the hot side more often than not. The Midwest and East continue to be too variable to maintain significant high-demand levels.”

On the tropical front in its 5:00 p.m. EDT Tuesday report the National Hurricane Center (NHC) reported that now Post-Tropical Storm Gert was headed into the Atlantic 750 miles northeast of Bermuda and was down to 40 mph winds. NHC was also following a large tropical wave positioned in the eastern Caribbean at 18N, 66W. The wave was moving to the west at 20 mph and NHC said slow development was possible. It gave the system a 20% chance of development into a tropical cyclone in the next 48 hours. A “well defined” tropical wave west of the Cape Verde islands at 17N, 24W was also under observation.

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