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Bearish Consensus Building; May Falls Again

May natural gas futures continued to retreat Tuesday as traders were inclined to sit on the sidelines and await Thursday's Department of Energy (DOE) report on inventories. Some see prices eventually reaching $4.00. At the close May had fallen 5.8 cents to $4.231 and June skidded 5.9 cents to $4.304. May crude oil shed 13 cents to $108.34/bbl.

According to some, Tuesday's trading looked like traders were "increasingly likely to hang back and wait for Thursday's DOE storage report before adjusting exposures," said Tim Evans, an analyst at Citi Futures Perspective in New York. "We're forecasting a supportive 58 Bcf withdrawal, but with more neutral numbers to follow we see some risk of a 'sell the news' reaction, with the market vulnerable down to the $4.00-4.10 area as the market anticipates relatively easy seasonal storage builds in the month or two ahead. Summer heat and hurricane threats to supply from the Gulf of Mexico may have to be at least somewhat more imminent before the market can make a sustained push higher, in our view."

Top traders are taking a wait-and-see position on the market's next move. "Although the market is beginning to acquire a heavy feel and while we still look for an eventual price decline toward the $4.00 level, we don't view such a development as imminent," said Jim Ritterbusch of Ritterbusch and Associates. "We look for the funds to remain selective in reloading into the short side of this market by awaiting price advances back toward last week's highs where risk/reward ratios would appear more attractive toward a short position. In sum, we are maintaining a neutral near-term trading bias on the expectation of additional wide price swings in both directions," he said in an afternoon note to clients.

Analysts looking for a continuation of the economic recovery were dealt something of a setback with the 10 a.m. EST release of the March Institute for Supply Management (ISM) non-manufacturing index. The non-manufacturing ISM surveys nearly 400 firms from 60 sectors across the United States, including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade. Traders had been expecting February's strong reading of 59.7 to continue into March, but the actual figure came in at a somewhat disappointing 57.3. Equity markets eased.

Short-term trader sentiment is bearish as well, fueled in part by weather forecasts calling for mild temperatures across the eastern half of the country. "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," said a New York floor trader following Monday's close.

Weather forecasters and their models are being forced to deal with normal spring variability and it makes for uncertain forecasts. "This is probably a symptom of the higher degree of variability and variables seen in the springtime, but we are seeing some rather big splits on the models this morning," said Matt Rogers, president of Commodity Weather Group. "The American ensembles are delivering a more impressive cool push to the Midwest and East by late in the six-10 day [forecast], while the European models are warmer again (and focusing the cooling in the West). By and large, we favored the European side of the story this morning and wait until the 11-15 day [forecast] to start bringing more cooling back to the Midwest and then East (albeit with very low confidence even then)," he said in a Tuesday morning note to clients.

Longer term, analysts suggest that natural gas prices may be caught in a broad trading range. Any trend higher or lower may be a while in developing. "Is there a longer-term trend here? If there is, then it is very well hidden," said Walter Zimmermann of United-ICAP in a monthly report. "Look at it this way -- the average daily close since the day of the $2.409 low [September 2009] is $4.357 and natgas just closed at the $4.389 level [Thursday]. Natgas is mired in congestion at the midpoint of a big congestion zone."

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