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$4 In Sight, Traders Say; June Stumbles

June natural gas futures continued to flounder Monday as traders see no upward momentum and look for a test of key psychological support. At the close June futures had fallen 8.1 cents to $4.154 and July had retreated 8.1 cents as well to $4.216. June crude oil, however, rocketed higher by $5.37 to $102.55/bbl.

"I am looking for a test of $4.05 and then $4," said a New York floor trader. He added that if the market were to breach $4, there would likely be sell stop orders that could propel the market still lower. Crude oil's sharp gain stood in stark contrast to natural gas' decline, and often traders will spread one futures position against another, but the trader was not aware of any effort to reinstate what had been a popular trade, long crude oil and short natural gas.

According to Walter Zimmermann, vice president at United-ICAP, the demise of natural gas is due to not only its ample supply, but the fact that it is a domestic commodity and not subject to a deteriorating U.S. dollar. It's his conclusion that surging oil and commodity prices are the result of Federal Reserve policy emphasizing a weaker dollar and ultra-low interest rates and these "are finally being realized on a wider scale... Trading commodities to the long side is the way to go. One result of this rapidly dawning recognition are the trillions of dollars sloshing around in markets that were never designed to handle this kind of volume. When markets designed for longer-term hedgers are subjected to a sustained onslaught of billions of dollars in short term speculative trading... well then things can be expected to get wild and stay that way... so forget fundamental analysis. And keep your eye on the U.S. dollar," he said in a weekly note to clients.

Is natural gas immune to this type of speculative trading? Data from the Commodity Futures Trading Commission (CFTC) suggests not. In its May 3 Commitments of Traders Report the CFTC reported a large move by managed money to the long side of the market, just two days prior to the 31.6-cent decline of last Thursday following a moderately bearish government inventory report.

At IntercontinentalExchange managed money increased its long futures and options (2,500 MMBtu per contract) position by 17,302 contracts to 369,345 and short futures and options declined by 1,099 to 50,626. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) held by managed money rose a hefty 46,269 to 182,950 and short holdings added 3,331 to 210,679. When adjusted for contract size, long holdings at both exchanges jumped 50,594 and short positions rose by a meager 3,057.

For the five trading days ended May 3, June futures rose 22.6 cents to $4.670.

Other analysts see last week's early rise in natural gas prices resulting from hopes that the U.S. economy would continue to improve. "But at the first sign of equity weakness and weakness in commodities in general, the gas market quickly gave back its hard-earned gains. The fundamentals continue to weigh heavy on the gas market," said Mike DeVooght, president of Colorado-based DEVO Capital.

From the bulls' perspective, weather fundamentals are still a burden. Commodity Weather Group of Bethesda, MD, said in its morning report, "This week features a moderate to strong surge of warming from the Deep South into the Midwest with 80s in much of the Midwest, 90s in the lower Midwest and 90s down in Texas (mainly low-to-mid). By the six- to 10-day [period], a cool push returns to the Midwest, South and East," the firm said. "The cooling is not strong enough to trigger exceptional overnight heating demand, but it is strong enough to kill daytime early season cooling demand. The result is a low-demand forecast situation. Even the warming that returns in the 11-15 day [forecast] is only on the weak side (with many models even suggesting only near-seasonal temperatures)."

It's not glamorous, but DeVooght continues to trade the range. "On a trade basis we will continue to use rallies into the high $4 level as a selling opportunity, primarily utilizing collars and selling call premium. If we break back under $4.00, we will book profit on the short calls and sell put premium. Not exciting, but the best way (in our opinion) to trade this market until we get a break of the range."

Last week DeVooght missed his objective to sell call premium. "We will continue to hold our current collars and will look to sell calls if we trade back above $4.60 or sell puts if we break below $4.00," he said.

DeVooght recommends that trading accounts and end-users sell June $4.80 calls should June trade that high. Producers should continue to hold a June-October strip consisting of $4.50 put options offset by the sale of $5.50 calls at even money for 10% of market exposure, he said.

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