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Traders Selling Puts and Calls to Cope With Market; May Slides

May futures fell in light trading Monday as traders factored in moderating temperatures and looked for prices to decline nearly 20 to 30 cents. At the close May natural gas had dropped 7.3 cents to $4.289 and June shed 7.4 cents to $4.363. May crude oil continued higher, adding 53 cents to $108.47/bbl.

"We bounced around between $4.34 and the $4.27 area, and I think we will go a little bit lower this week. All the other markets were rallying today and that might have supported natural gas some [or kept it from falling further]," said a New York floor trader.

He added that he was looking for a "pullback to the $4 to $4.10 area."

Major shifts in allocation by funds and managed accounts for the five trading days ended March 29 had little impact on near-term futures, according to government data. The Commodity Futures Trading Commission in its weekly Commitments of Traders Report showed that managed money liquidated short holdings and added long positions, though near-term futures fell. At IntercontinentalExchange (ICE) long futures and options (2,500 MMBtu per contract) rose by 48,676 to 327,927 and short contracts dropped 40,708 to 41,457. At the New York Mercantile Exchange (Nymex) short futures and options (10,000 MMBtu per contract) still outnumbered long holdings by a 3:2 margin and as of March 29 long holdings increased 1,162 to 139,289 and short holdings tumbled 26,254 to 214,176.

When changes at both ICE and Nymex are adjusted for contract size, long futures and options at both exchanges rose by 13,331 and short contracts fell by 36,431. For the five trading days ended March 29, May futures fell 6.8 cents to $4.263.

Commodity Weather Group in Bethesda, MD forecast normal to above-normal temperatures in its six- to 10-day forecast south and east of a broad arc extending from West Texas to southern Wisconsin to northeast Pennsylvania, but according to President Matt Rogers, "Unlike last April, there is enough pattern variability to prevent sustained much or strong above normals from completely dominating any one period. Therefore, widespread much-above-normal coverage on the period maps is more difficult to achieve. The American and European ensembles [weather models] are showing more widespread Midcontinent cooling by later in the 11-15 day, but like recent false alarms, they may be missing stronger warming out ahead of it and overplaying the intensity."

Market analysts see the warmer weather pulling the plug on higher natural gas prices. "The official start of spring has already been passed, and each day that is seen on the calendar pushes us nearer to the time when the warmer signs of spring's rebirth will be all around us. This will take one of the pillars of support out from under prices," said Peter Beutel of Cameron Hanover.

"We should expect to see prices decline from existing levels. They are overbought and into resistance and are probably overdone on the upside largely because of short-covering by funds that had been short for a long time. But once the liquidation is over, we would expect substantially less new selling.

"We think that prices have turned an important corner that is above and beyond temperatures. The problems in Japan 'explained' to U.S. markets that natural gas is truly a global commodity, and businesses are now trying to come to grips with that. The president's recent speech on U.S. energy sufficiency has brought home to many realists the very central role that natural gas will need to play in any American move to self-sufficiency," he said in a morning note to clients.

Earlier, Mike DeVooght of DEVO Capital, a Colorado-based trading and risk management firm, booked profits on the previously sold $4.05 April put options when they fell to a penny, and now DeVooght says "the gas market is establishing a base and will most likely continue to trade in the high $3 to high $4 range in the weeks to come. We will continue to sell put premium when we approach the $4 level and sell calls and contracts when we approach the $5 level."

End-user accounts are counseled to stand aside, and producers and those with exposure to lower prices should continue to hold the remainder of an April-October strip consisting of long $4.50 put options offset by sales of the $5.50 call option at even money for 10% of their market exposure, DeVooght said.

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