Amid a steady and seemingly limitless stream of commercial buying, natural gas futures rallied for the second-straight session Monday, as traders priced in the first forecasts for hot weather in the eastern U.S. Breaking through several important technical levels to notch its daily high just moments before the closing bell, the July contract finished 25.7 cents higher at $4.179.

According to the latest 6- to 10-day forecast released Monday by the National Weather Service, above-normal temperatures are forecast for the vast majority of the country, including a large swath extending from Southern California to Maine. Included in this protracted area of hot temperatures, are the population centers of East Texas, Atlanta, North Carolina, Washington D.C, New York, and Boston.

While non-commercial speculative accounts hold relatively large net short positions right now, they were not seen covering shorts yesterday, a source commented. Instead, what he saw was good strip-buying from commercial hedgers looking to lock in their price, either for this summer’s cooling needs or next winter’s heating requirements. The proof of this was seen in the almost uniform price increases across the out months. The summer and winter strips kept pace with July by trading up 25.5 cents and 25.4 cents respectively. Meanwhile the 12-month strip was not far behind, gaining 24.1 cents for the session.

The fact that neither the July-August nor the August-September basis has blown out on the move higher, leads Tim Evans of New York-based IFR Pegasus to surmise that fund traders still hold sizeable short positions that they may ultimately need to either cover outright or roll into the out months. “Typically, we see them roll their position to the next month out, but that would imply buying July and selling August, or buying August and selling September. In either case the spreads between those months should begin to widen and they have not.”

Historically, non-commercial fund traders have made a living on natural gas futures by buying as the prompt month crosses above the 40-day moving average, and selling the market as spot prices plunge beneath it. If they employ that strategy one more time, they will be looking to cover shorts as July moves back above its 40-day at $4.48. “If the funds begin to cover, we could see another 30-40 cents of upside in a fairly short period of time,” said Evans.

In an attempt to take advantage of such a move, Evans recommends buying a break above yesterday’s $4.21 high. However just as there is a potential for some serious upside, so too exists the potential for sizeable loss. “Because of the volatility, you have to be a little aggressive with your stop. We could consolidate and pull back a little here without changing the intermediate outlook.” That said, Evans looks to protect his long exposure with a sell-stop at or near the $4.00 level.

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