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Oil, Products Soar, But May NatGas Only Inches Higher

May natural gas futures gained ground in active trading Wednesday as traders covered short positions in seeking to minimize exposure over the upcoming three-day weekend and not get caught on the wrong side of what could be a developing market trend. At the end of the day May had risen 4.8 cents to $4.310 and June gained 4.7 cents to $4.357. May crude oil vaulted higher $3.17 to $111.45/bbl.

Short-term traders see the gains in natural gas as the result of short-covering. "We had a sustained push down to $3.99 and that caught some large black-box funds that had loaded up on the short side," said Eric Bentley, CEO of VKNG Energy LLC, New York.

He added that when prices advanced to $4.20 "that certainly woke some people up and prompted buying towards the close Tuesday, and that continued into Wednesday. A lot of that is in front of the abbreviated [trading] week, the [storage] number Thursday, and the overall bullish gods in energy, crude and heating oil."

Bullish gods indeed. May heating oil rose more than 6 cents to $3.2214/gal and May RBOB gasoline gained more than 4 cents to $3.2773/gal. Petroleum prices also got a lift from a bullish Energy Information Administration (EIA) petroleum inventory report. Crude stocks fell 2.32 million bbl versus expectations of a 1.3 million-bbl build shown in a Bloomberg survey.

"We are at the time of year when cooling load is starting to pick up, there is strength in the cash market, and there is heating load in the northern tier of the country. Things are starting to turn around as there is more gas-fired electrical demand," Bentley said.

The 10:30 a.m. EDT release of inventory figures for the week ended April 15 by the EIA should give traders an early read on what lies ahead for the injection season. Last year at this time 75 Bcf was injected and the five-year average is much lower at 34 Bcf. Industry estimates split the difference. A Reuters poll of 27 analysts showed a range of an injection of 40 Bcf to 80 Bcf with an average of 53 Bcf., and analyst Tim Evans at Citi Futures Perspective in New York expects an increase of 58 Bcf. Industry consultant Bentek Energy, utilizing its flow-based model, predicts a build of 51 Bcf.

The Colorado-based firm forecasts a build in the East Region of 32 Bcf, an increase in the Producing Region of 18 Bcf and an injection of 1 Bcf in the West Region.

Bentek noted in its weekly report that "The winter of 2010-2011 was the 27th coldest winter during the past 60 years, causing storage inventories to start the injection season 131 Bcf below the five-year high set last year despite record-high production levels. The past two seasons have both had extreme temperatures, which seems unlikely to happen during the summer of 2011." Bentek expects storage levels at the end of the injection season to establish a new record above 4 Tcf.

Abundant season-ending storage or not, the conventional wisdom is that natural gas futures are stuck in a trading range between the upper $3 area and low to mid $4. Recent price strength still places the market within those broad parameters, but at what point would the trading range give way to a new trend? If prices continue higher, that trend would presumably be up.

Analysts at United-ICAP show a convincing technical picture of a congesting triangle formed from the spring of 2009. Lower high prices and higher low prices are on a collision course, and typically prices break out of congestion patterns to resume the dominant trend. Walter Zimmermann, vice president at United-ICAP, depicts just such a pending technical collision with the $6.108 high of January 2010 forming the high point of the triangle and the low of $2.409 in September 2009 forming the low point. Since then prices have been narrowing in and still reside within the triangle, but the triangle currently shows a potential change of trend to the upside should prices make a meaningful break above $4.61.

"We present this chart to ask a question we have raised before: Is there actually a trend here? Or is natgas merely congesting?" Zimmermann queried in a recent report. In his view, natural gas is congesting, and "The triangle shape suggests the latter."

Floor traders had their own ideas Tuesday about when upward price momentum might at least attract present short holders anxious to not get caught on the wrong side of an unfolding price uptrend. "You will probably see $4 before you see $4.40. The way the market has been going lately, it is anybody's call. Everybody was bearish last week and now that we are up in the $4.20s, we might see a little follow-through again. There's nothing [fundamental] to talk about," said a New York floor trader. When queried about the large short fund position he said, "If it gets up there [$4.40], you might see some [buying] interest up there."

Some traders may have already been left behind. According to a continuation chart, the widely followed 40-day moving average was breached to the upside last Thursday when May settled at $4.212.

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