On August 1, the U.S. Energy Information Administration (EIA) released its weekly natural gas inventory report. The report showed that working natural gas inventories increased by 18 billion cubic feet as of last week, below analysts' general expectations of 31 billion cubic feet.

Current inventory levels are 25.2 billion cubic feet above the same time last year and 44.1 billion cubic feet above the five-year average.

Natural gas prices rose as a result of the report. Despite high production, inventory growth fell short of analysts' expectations and has been the main bearish factor in the natural gas market recently.

Demand for natural gas is currently strong due to the hot weather. Forecasts indicate that demand will remain strong over the next seven days, which could provide additional support to the natural gas market.

Fundamentally, the market remains oversupplied. The weather in the first two months of this summer did not provide enough support to the natural gas market and it remains to be seen if the supply/demand balance will improve in August.

From a technical perspective, natural gas is strongly supported in the $2.00-$2.05 range. However, the recent rally has been driven primarily by short covering. Natural gas needs real buyers to drive sustained upside momentum, but those buyers may need to see more favorable factors before betting on a rally.