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Market Seen Closer to Value, but Vulnerable; June Sags

June natural gas futures continued to drop Friday as traders now see the market at a level more prone to reflect value but still poised to move lower in the near term. At the close June had weakened 2.6 cents to $4.235 and July had dropped 3.4 cents to $4.297. June crude oil continued its descent, losing $2.62 to $97.18/bbl.

"For the natural gas market Thursday was sort of the shot in the arm and the market headed back to some sort of reality," said Eric Bentley, CEO of VKNG Energy LLC in New York. "There were speculative longs running out of the market who had been long north of $4.50 and now we are back to real price and value as opposed to a market pumped up with fund money.

"Everybody ran into this market and everything was going up, but the writing was on the wall the other day when [George] Soros said he was taking money out of metals, and I don't know if the same was true of oil, but a lot of money came out of the [natural gas] market. Overall, I think the market is poised and vulnerable to another test to the downside."

Earlier in the week the Wall Street Journal reported that George Soros' hedge fund, a firm operated by investor John Burbank, and some other investors had sold much of their gold and silver because there's less chance of deflation. Prices were also under pressure because Comex, the operator of CME (Chicago Mercantile Exchange) Group's silver futures trading, increased margin requirements after the close of trading Tuesday.

It is Bentley's contention that $4.34 will offer the market formidable resistance to any upside moves from here. "We saw lots of selling up at $4.34, and the fact the market couldn't get any new legs over that gives me concern," he said. "We haven't had a 31-cent move in a while. That certainly rattled a few trees, and you saw some money swing from one book to the other."

If the market can make it up above $4.34, things may change. "It looked like there was some good volume trading around $4.33 to $4.34 Friday along with some good outright size bids and offers. I use that number because it is one-third of each dollar move, and $4.67 would be another big number. Those numbers have always been significant," Bentley said.

On the downside, Bentley suggested that $4.00, or a break or hold at that level, would get a lot of attention as well. "If we broke $4, it would probably bring some money back into the short side. [A break of] $4 might get you to $3.80 quick. Natural gas had been something of a speculative game, but there is a bit of equilibrium from a fundamental picture now."

According to some, the 34.2-cent decline registered by the June contact over the past two trading days is a sign of lower prices to come. "While the gas trade trailed the petroleum to some degree, fresh fundamental/technical input appeared to be exhausted following [Thursday's] broad-based commodity collapse and a bearish storage figure," said Jim Ritterbusch of Ritterbusch and Associates. "From here, we continue to expect a ratcheting process to lower levels to within the $4.06-4.10 zone per nearby futures in response to a strong production pace. This output strength was further indicated per today's Baker Hughes report that indicated an eight-unit increase in the gas-directed rigs while total horizontal units built by 15 to a new record level of 1,038.

"Looking ahead to next week, we expect prices to seek some direction from the petroleum complex on Monday followed by some Tuesday price consolidation. As usual, the late week trade will be mainly dominated by the storage numbers. We have shifted to a bearish trading bias while our longer-term one to two month views continue to favor an up and down wave-type price pattern as prices fluctuate in both directions within about an 80-cent range," he said in a note to clients after the close Friday.

On a more positive note students of the economy got a pleasant surprise with the 8:30 a.m. EDT release of April employment figures from the Labor Department. Expectations had been that non-farm payrolls increased by 185,000, down from March's 216,000, but the actual figure came in at a robust 244,000. The unemployment rate was anticipated to hold steady at March's 8.8%, but it edged up to 9.0%.

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