Natural gas futures traders on Monday shrugged off the arrival of Tropical Storm Fay and instead convincingly took out psychological support at $8 with a close of $7.888, down 20.4 cents from Friday’s finish. The close below $8 was the first since Feb. 6.

Fay was largely ignored Monday as the path consensus from forecasters had the storm tracking east of important energy infrastructure in the Gulf of Mexico. “Fay is forecast to be a Category One hurricane when it makes landfall between Fort Myers and Naples, FL, on Tuesday,” said Brett Anderson, a meteorologist with AccuWeather.com. “Fay is now expected to continue to slowly track northward through Florida Tuesday night and early Wednesday.”

Traders were putting Fay to the side as they focused on other market-moving items. “Unless they vote to begin drilling offshore Florida, storms with a forecasted path such as Tropical Storm Fay don’t mean a whole lot to natural gas production,” said a Washington, DC-based broker.

Breaking down the numbers, the broker said the market has penetrated whatever psychological resistance resided at $8. “There is a lot of talk out there focusing on how healthy supply is. When the chattering is all about new supply, it is no wonder you have prices falling like this,” he told NGI. “That said, estimates place costs to produce gas in North America at $9, so the question is how quickly does the marginal cost argument bite into the market. With gas prices now at $8/MMBtu, some might decide they are losing too much money and pull up their rigs to play somewhere else. I don’t think the ‘driller response’ is likely to hit in the short term to cause a revival of the bull market, but I do think it will be something that comes into play over time.”

Even with a healthy supply situation, the broker said the storage situation could be on the side of the bulls. “Storage is currently 330 Bcf below year-ago levels and some of the things I have been reading say that unlike the previous two years, there will be no storage glut this October,” he said. “The idea is storage is not as bearish as it seemed back in January. Despite the deficit, the robust supply reports on the Marcellus and Barnett have been keeping the shorts fat and happy.

“I’m still happy to be a bear here as I see a possibility to get down into the $7.50s, which is certainly doable from a technical perspective. In comparison to two weeks ago, we are a lot less bearish than we had been, but we are still bearish. The pace of decline has obviously moderated, but we haven’t seen anything on the charts yet that gives us that clear capitulation. As an example, a capitulation day from our current $7.900 price level would likely include a 70- to 80-cent drop, but end up closing only up or down a nickel on the day. That is the type of dynamic that would mark a change in direction, but we have not seen it yet.”

Since natural gas futures continue to weaken, traders are not optimistic that prices will rally anytime within the next two weeks, hurricane season notwithstanding. “The shape of last week’s candlestick reveals a failed attempt to rally. And Friday’s tiny range reveals an utter absence of short-covering,” said Walter Zimmerman of United Energy.

According to Zimmerman, those two developments “do not bode well for natgas bulls from here.” A key test is looming. September futures need to hold and trade higher from $7.735 in order to maintain any hope of a price advance, he said. In Zimmerman’s view, $7.735 represents a key 0.618 retracement of the long-term advance from late September 2006 of $4.050 to the recent early July high of $13.694. If the market doesn’t bounce off $7.735, then the market could be headed for “a further decline for spot to the $6.810-6.445 area. The history suggests we should avoid the short side after Labor Day. That leaves two full weeks of trading for the bears. That is plenty of time to produce a $6 handle,” he said in a Monday morning note to clients.

Monday also saw Nymex Holdings’ shareholders and its 816 seatholders voting to accept the merger proposal from CME Group. Market watchers said energy traders are not expected to see any changes in day-to-day trading as a result of the union (see related story).

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