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Rangebound Market a Challenge for Traders; May Softens

May futures drifted lower in uninspired trading Friday as traders struggled to get orders filled and had to adjust to a low-volatility rangebound market. At the close May futures had inched lower 0.8 cent to $4.204 and June fell 0.5 cent to $4.264. In contrast, May crude oil bounded higher by $1.55 to $109.66/bbl.

Traders had a hard time with Friday's narrow trading range and low volatility. "I've had an order to buy financial gas 2 cents under the market and it hasn't filled in over two hours," lamented an Oklahoma trader.

"The range [May futures] has only been between $4.24 and $4.17, and it's been a tremendously boring day. If someone is on the bear side of the market, they could probably buy put options Monday since I think the volatility will come off even more and that should cheapen those puts a little bit."

"If you are thinking about a play involving an increase in volatility, that might be the time to buy options," he suggested. Conversely if one were thinking of trading the bull side of the market, purchasing call options would position the trader directionally, and if the Oklahoma trader is correct in his estimate of volatility, also take advantage of that dynamic.

Consistent with low volatility is a market some see stuck in a range. "Thursday's storage report was supportive relative to market expectations, but the net injection was only a match for the five-year average, and thus neutral in economic terms," said Tim Evans of Citi Futures Perspective. "We continue to see the market as undervalued relative to the near-average storage total but currently lacking any particular upward pressure to drive a price recovery. Seasonal demand will decline on into May before cooling demand begins to limit storage injections and that gives the market some potential to probe the downside over the next few weeks."

The 28 Bcf injection reported by the Energy Information Administration (EIA) Thursday came in nearly 10 Bcf less than what traders and analysts were expecting, which begs the questions: is the supply-demand balance shifting, and are assumptions about plentiful shale gas production offsetting declines elsewhere correct?

For the moment analysts see the market as having taken into account the lower injection figure.

"The market has duly discounted a smaller-than-expected storage figure and will now move on to other items. However, with the market now well into its shoulder season, significant headlines capable of pushing values appreciably in either direction will remain elusive," said Jim Ritterbusch of Ritterbusch and Associates. He is viewing trading in the coming month as "largely technically driven and generally confined to a comparatively narrow trading range that we have suggested as about $4.00 to $4.30 for the most part."

The EIA, in its April Short Term Energy Outlook released Tuesday, seems to think production growth will slow in 2011 compared to 2010. Production growth is forecast to be 2.4% in 2011, well below the stout 4.5% recorded in 2010. A lower natural gas rig count is identified as the factor leading to the lower growth. For the moment that seems to be the case. Baker Hughes reported that as of April 15 rigs drilling for natural gas declined by four to 885 relative to last week. A year ago 973 rigs were drilling for natural gas.

The decline in natural gas rigs may be deceptive. The driving factor these days in exploration and production is developing shales. The target is less natural gas but the production of associated condensate, which is priced relative to crude oil. With condensate production comes natural gas, so the production of natural gas may not taper, as the EIA suggests, as long as crude oil prices remain high.

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