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Nervous Shorts, Rising Waters Help Lift Futures; June Up 7.2 Cents

June natural gas futures rose Monday as traders viewed rising floodwaters as a threat to supply, and those holding short positions elected not to fight the trend. At the close June had risen 7.2 cents to $4.318 and July was up 6.8 cents to $4.379. June crude oil skidded $2.28 to $97.37/bbl.

"The market picked its head up a little, and I think it is traders doing some short-covering," said a New York floor trader. "I think some traders got short in the low $4.20s to high teens last week and decided to bail, but it may be difficult to sustain a rally with the other markets coming off."

"The weak crude oil and gasoline might lean on this market a little bit and it might be vulnerable to a bit of a pullback, but I think the bulls are looking at $4.45 to $4.50 to generate still more buying if they can get it that high," the trader said.

According to Tim Evans, analyst at Citi Futures Perspective in New York, the natural gas was lifted higher by "reports that Louisiana flooding may reduce supply from the state by an estimated 263 MMcf/d [see related story]. There's also been a pause in the ramp-up in nuclear capacity, with the overall nuclear industry operating rate holding at 75%. We still anticipate a trend toward a higher, more normal operating rate before seasonal temperatures create higher power loads," he said in a note to clients..

The most recent Commodity Futures Trading Commission Commitments of Traders Report for the five trading days ended May 10 showed a high correlation between funds and managed accounts exiting long futures and options trades, the initiation of new short positions and sharply lower prices. At the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) held by managed money rose 32,591 to 401,936 and short positions fell by 12,722 to 37,904. Just the opposite took place at the New York Mercantile Exchange. There long futures and options (10,000 MMBtu per contract) fell 44,629 to 138,322 and short positions rose by 16,173 to 226,852 contracts. When adjusted for contract size, long futures and options at both exchanges fell by 36,482 and short contracts rose by 12,992.

For the five trading days ended May 10 June futures fell a stout 42.4 cents to $4.246. On May 5 the June contract tumbled 31.6 cents as an Energy Information Administration inventory report came in slightly bearish, but other petroleum markets tumbled with crude oil losing nearly $10/bbl.

Tom Saal, in his work with Market Profile, saw a period of consolidation followed by a hefty advance in prices. In a morning note to clients he said, "Look for the market to test last week's value area at $4.158 to $4.212." Following that he expects June futures to rise and test a large value area between $4.351 and $4.729. Saal is not specific in his timing but said, "Typically value areas are filled the next day."

Market Profile was developed by Chicago grain trader Peter Steidlmayer and was the result of his observations that prices often formed a bell-shaped curve. He would plot prices throughout the day and as prices gravitated away from the mean of the curve he would buy or sell accordingly, anticipating that prices would gravitate back to the mean. Saal uses a similar approach and plots natural gas prices to construct Market Profiles in daily, weekly and monthly time frames. Value areas typically form when price action leaves large, unfilled areas in the bell-shaped curve. One of the major tenets of Market Profile is that the market will eventually trade back and "fill" these portions of the curve.

Filling the value areas at higher prices might become a little easier if near-term weather forecasts calling for warmer temperatures are realized.

"After a few false starts, the models are finally converging on an idea for more widespread warmer-than-normal temperatures in especially the Midwest and South in the six- to 10-day time frame," said Matt Rogers, president of Commodity Weather Group in Bethesda, MD. "There is still the concern that widespread precipitation will limit the high temperatures at times, even inside this warmer air mass, but widespread 80s seem more likely for the Midwest with 80s-90s in the South. This warming tracks toward the East Coast late in the six-10 day and into the first half of the 11-15 day (80s favored for highs). The West still leans cooler in the six-10, then trends warmer toward 11-15 before maybe trending cooler again late."

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