August natural gas futures drifted lower Monday as traders expect a rangebound market. At the closing bell August futures had fallen 1.3 cents to $4.386 and September had shed 1.5 cents to $4.355. September crude oil retreated 67 cents to $99.20/bbl.

“There just wasn’t much happening. and we traded within a 3-4 cent range most of the day,” said a New York floor trader. He added that spread trading was sluggish as well with the August-September spread narrowing to about 3 cents.

“I think the market will stay in this range for a bit, $4.20 to $4.50, for another week or two until we can break out of it. The weather is pretty much a given, and we’ll have to wait and see what the [brutal] weather of last week did to storage. We’ve got some hot, hot weather and we are still not rallying. That leads me to believe that we are headed down to the $4.10 to $4.20 area eventually,” he said.

The trader noted that outside of a hurricane pointed directly at the heart of the Gulf, the news couldn’t get much more bullish.

As temperatures and forecasts last week for Midwest and eastern energy markets warmed up, directional traders elected to trim short holdings, according to data from the Commodity Futures Trading Commission. For the five trading days ended July 19, the Commitments of Traders Report showed a minuscule reduction in long futures and options positions but a sizeable contraction of short holdings at both major exchanges.

At the IntercontinentalExchange managed money lowered the number of long futures and options (2,500 MMBtu per contract) by 7,509 to 438,961 and increased short contracts by 26,679 to 149,522. Over at the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by 1,492 to 143,898 and short positions tumbled by 32,562 to 211,206. When adjusted for contract size long holdings at both exchanges fell by a mere 385 contracts, and short positions dropped by 25,892. For the five trading days ended July 19, August futures rose 20.0 cents to $4.533.

In a monthly assessment of energy markets Mike DeVooght of DEVO Capital, a Colorado-based trading and risk management firm, said, “Fundamentally, the market is getting mixed signals. Hydro issues in China and the fallout from the nuclear disaster in Japan are driving up demand for distillate products, which is keeping Brent prices and crack spreads well bid. Over the past month, natural gas traded sideways. The fundamental outlook remains negative, and any rallies are met with heavy selling by both producers and speculators. Weaker economic numbers have many concerned about longer-term demand for energy products.

“It has been our thought that the commodity increases we saw earlier this year were unsustainable if employment and income levels were not going to improve. Many of the commodities have stopped going up and have actually started to decline. But the declines have not been nearly enough to give the consumers around the world any relief. We feel the equity markets, the bond markets, and the break we saw last month in the oil markets [were] a shot across the bow for the major world economies. We could see spikes higher in the commodity markets in the short term, but longer term if input costs continue to rise, it will assure weaker demand for commodities in the future,” he said in a monthly report to clients.

“On a trade basis, if you are in the markets on the short side, be prepared for short term rallies. If you need to sell, use the rallies as an opportunity to do so.”

The ongoing pattern of heat dominating the central portion of the country with occasional forays eastward is expected to continue. In its six- to 10-day outlook, Commodity Weather Group of Bethesda, MD, said, “As we have seen all summer long, the mainly Midcontinent-centered hot ridging pattern is expected to wobble again over the next few weeks. We see it expanding eastward later this week to deliver another heat event to the East (should be less intense than last week’s powerhouse). And then it stretches westward toward the West Coast in the six- to 10-day [forecast] with at least 90s back into California again for a spell.”

“The 11-15 offers a break to the Northeast and maybe Mid-Atlantic (similar to mid-July), but the main hot ridge axis still focuses around the Plains. The Tropical Wave near Cuba is forecast to track west-northwest with most models still showing no signs of development. The upper-level pattern is not supportive either,” said Matt Rogers, president of the firm.

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