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Futures Fall Below $4 as Recent Rally Deemed 'Overdone'

Despite crude futures reaching a six-month high on Tuesday, natural gas futures traders weren't biting like they were on Monday as the June contract pushed back below psychological support at $4, stamping out the recent rally that saw a high of $4.575 less than a week ago. Even the early arrival of a Gulf of Mexico-threatening tropical disturbance wasn't enough to prop natural gas futures up as the prompt-month contract closed Tuesday's regular session at $3.914, down 22.5 cents from Monday's finish.

While natural gas was falling on the day, June crude traders were looking to add to the contract's $2.69 gain from Monday. June crude futures reached a high of $60.48/bbl before expiring at $59.65/bbl, up 62 cents from Monday. July crude picked up 51 cents to close at $60.10/bbl.

In the gas market, there was some debate as to whether Tuesday's decline was sparked by profit-taking or a fresh round of selling. "I'm not so sure we can just attribute Tuesday's drop to profit-taking. To say it is profit-taking is to imply that there were a lot of new longs in the market on the run-up, but I think the rally was probably nothing more than short-covering," said Julio Sera, a broker with Hencorp Becstone Futures LC in Miami. "Right now we are trading within a range between $3.500 to $4.500. The push to the upside was substantial, but in my opinion was also overdone. I would not be surprised if prices fell some more in the near term as some more selling comes in."

The broker said the market still has a bearish tint to it, but a real turnaround could lie ahead sometime this summer. "Things are a little complex right now. The only thing that I can surmise is that we are coming up on contract expiration and there really has not been anything to indicate that there has been a strong recovery in industrial demand. That said, the rig count continues to go down so values are going to pop up at some point. The old adage still holds true. The cure for low prices is low prices."

Sera noted that natural gas -- unlike the liquids -- is staying more true to its fundamentals. "Natural gas is really performing more inline with its fundamentals than any of these other markets. Crude is out of control in comparison," he said. "Until we get some real indication that industrial demand is on the rise, I think we are likely in store for some more range-trading here. I don't think we'll make more lows, but the price is pretty comfortable in this general area."

Some analysts were on board with the idea that the recent rally might have been a little exaggerated. "The natural gas market continues to probe the downside, despite the emergence of tropical disturbance 90L as a possible visitor to the Gulf of Mexico," said Tim Evans, an analyst with Citi Futures Perspective in New York. "This suggests that natural gas may have become somewhat overvalued via its May rally, leaving it vulnerable to the ongoing flow of bearish storage data."

Evans said he sees above-average storage injections continuing for the next few weeks, which could extend even longer depending on the weather pattern and the pace at which supply declines. However, the large injections are likely to fade later in 2009, he added. "We expect a tightening market over the second half of the year, but there could be a period of gradual transition before the supply/demand balance turns fully to a deficit."

Economy rebound watchers got a bit of bad news with the 8:30 a.m. EDT Tuesday release of April housing starts by the Commerce Department. The figures for April came in at a disappointing 458,000, much lower than the 540,000 analysts were expecting. These figures were also below March starts of 510,000.

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