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Traders See Retest of $4.00, Yet May Advances

Thanks in part to some kind words for the commodity from the President of the United States, May natural gas futures recovered a hefty chunk of Tuesday's losses Wednesday as traders sensed a surge past recent highs. However, the move fell short as May added 9.2 cents to $4.355 and June added 9.1 cents to $4.426. May crude oil retreated 52 cents to $104.27/bbl.

During a speech at Georgetown University in Washington, DC, on Wednesday, President Obama called natural gas a "new source of energy," adding that "the potential for natural gas is enormous" and that the resource could greatly help diminish the country's dependence on foreign energy (see related story).

"The market feels like it wants to go higher, but it's kind of like a mixed bag. Prices fell hard Tuesday on expiration, but now traders are buying. I think we will test $4.50 to $4.55," said a New York floor trader.

In his view it looked like the market was setting up another trading range. "We've been trading between $4.15 to $4.20 and got as high as $4.48 on Monday. Maybe the market trades between $4.25 to $4.50 and then makes its next move in another week or so," he said.

"I am hearing a build of 5 Bcf in [Thursday's] inventory report. I think if the number comes out as people expect, you could see a little more buying in this market up to $4.55." He added that he thought a bullish inventory figure was more likely to move the market higher than a bearish number was to move the market lower.

Should the market trade as the floor trader suggests, buyers and sellers would have to be nimble. "I am just looking for the market to trade higher before we go back down and test $4.00, but I don't think that will be for another three weeks or so," he said.

Estimates of Thursday's Energy Information Administration (EIA) report vary widely. A Reuters poll of 28 analysts showed an average 1 Bcf withdrawal with a sample range of a draw of 24 Bcf to a build of 15 Bcf. Houston-based IAF Advisors expects a build of 13 Bcf, and industry consultant Bentek Energy, utilizing its North American flow model, predicts a build of 10 Bcf. These will all be compared to last year's 12 Bcf injection and a five-year average 22 Bcf draw.

In a report Bentek said the prediction of the first national injection of the season was prompted by strong injections in the Producing Region. "The East and West regions are both in withdrawal mode. The East started the week net injecting, but a cold front that hit the region Wednesday caused withdrawals to return. The West Region is back to withdrawals after reporting an injection last week, which was also due to higher demand caused by colder temperatures." Bentek also said injections in Texas increased 160% week-on-week and led to the calculation of an injection.

Bentek projects a withdrawal of 10 Bcf in the East Region, a pull of 5 Bcf in the West and a stout 25 Bcf build in the Producing Region.

Analysts suggest that temperature forecasts are likely to put a dent in storage inventories. "Temperature forecasts remain on the colder side, with early April readings likely to come in on the colder side. Private forecasters are suggesting that readings will be at least five degrees colder than normal, at least through the first few days of this next month," said Peter Beutel, president of Cameron Hanover. From his frosty perch in Connecticut he said, "Current readings are also below normal, and that could give us larger-than-expected drawdowns from underground storage facilities. The five-year average drawdown for this next report has been near 6.5 or 7 Bcf."

Beutel is thinking the long-term trend lower in natural gas prices may be over. "It does now seem to us that the trend may have changed for the next few years here," he said. "We understand that shale gas is cheap and plentiful, but we expect to see increasing amounts of it exported, and we expect to see industrial demand increase for gas."

Beutel doesn't say exactly who is likely to benefit from low prices, but "businesses will be able to come home after having been chased away in 2008. Of course, the question is whether they want to be subject to the same type of volatility going forward, and the answer, of course, is that they do not. We expect long-term hedging to come in soon."

Businesses may be somewhat cautious in returning to the market if recent economic data is any indication. The Conference Board reported Tuesday that consumer confidence not only fell but came in lower than expectations. Analysts were looking for a 64.0 reading, but the actual figure came in at 63.4. The figure was also down sharply from February's upwardly revised reading of 72.0. Higher food and gasoline prices were noted as contributing to the drop as well as a soft job market, according to reports.

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