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Government Warnings, Short-Covering Prompt June Gains

June natural gas futures rose in active trading Friday as both oil and gas traders reacted to government warnings related to data showing al Qaeda's interest in targeting oil and gas installations. At the closing bell June futures had gained 13.6 cents to $4.230 and July had risen 12.9 cents to $4.290. June crude oil gained $1.05 to $99.49/bbl.

"The market looked like it was going to tank, but around 11:30 there were some warnings by the FBI and other government agencies about al Qaeda focusing on fuel installations, both natural gas and crude," said Eric Bentley, CEO of VKNG Energy LLC in New York.

"Once prices [June futures] got north of $4.15, guys that were looking to buy gas in the $4.00 to $4.05 area may have decided they didn't want to go home short and prompted some pre-weekend covering. It was more of a technical bounce, a Friday short-covering rally, but we are closer to that $4.34 price, which was the week's high, and that looms large. Friday was a technical pop led by comments about al Qaeda from the government.

"When the market was trading at its [overnight] lows of $4.077, you could see that the size of the bids was pretty significant and you could tell there was some good scale-down fund buying through there. Those orders were unfilled during the day session and traders said, 'Forget it. I've got 30 to 40 cents [gain] in this market and I'm not going to risk that.' We haven't been below $4.05 in a long time, so you know that buying is out there."

According to The Wall Street Journal, revelations gleaned from the intelligence haul seized from Osama bin Laden's Pakistan hideout suggested that al Qaeda is interested in attacking oil tankers, Homeland Security officials said. That discovery prompted the agency to warn industry officials and local law enforcement.

A security warning from the government may not fall into the category of economic factors, but top analysts see the natural gas market as becoming more sensitive to macroeconomic factors, and if the economy remains soft, a weakened natural gas market may prove a tempting target for additional aggressive fund selling, Friday's short-covering rally notwithstanding.

"Natural gas pricing has become more sensitive to the various economic reports that have recently indicated a significant slowing in U.S. economic growth. This week's industrial production and housing data appeared particularly negative to the natural gas market as it is likely to force some downward revisions in natural gas industrial demand across this year," said Jim Ritterbusch of Ritterbusch and Associates.

"For some time the market appeared to be relying on industrial demand growth of more than 2% to provide a partial offset against expected additional gains in production through the spring and summer period. But with natural gas apparently getting swept up in a widespread derisking phase across a big chunk of the commodity space, commercials appear to have backed away from the buy side of this market while the hedge funds, etc. appear to be employing even minor price rallies as an opportunity to add length to substantial net bearish holdings."

Bulls can look forward to forecasts of warm, muggy conditions in populous East Coast energy markets.

"Next week should be the warmest of the season so far for the East Coast cities as temperatures persistently reach the 80s. Combined with moderate humidity levels, it could feel like the 90s at times," said Matt Rogers, president of Commodity Weather Group in Bethesda, MD. "Occasional thunderstorms threaten afternoon peak [energy] demand periods, but that higher humidity should keep off-peak temperatures buoyed higher (dew points in 60s). Otherwise, the six-10 cools the Midwest; the Southwest/SoCal see a moderate heat push, and then the East Coast cools by the holiday weekend. Another moderate to strong heat push is seen developing in the 11-15, aiming for the South and Midwest first."

Nuclear generation continues to ramp up production only modestly, thus bringing into play additional gas consumption as generating units slowly come back online. According to NGI's Daily Gas Price Index NRC Power Market Report, a stout 21,226 MW was still offline as of May 20 from 36 nuclear generating units either down for maintenance and refueling or operating at below capacity. A month earlier that figure was 28,145 MW.

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