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Cash Market Posts Strong Gains; May Futures Out Like a Lamb

With only a few exceptions all points rose Thursday with eastern points registering the strongest gains and weakness limited to a few points in the West.

On average, the cash market was a dime higher. The Energy Information Administration released inventory figures showing a build of 47 Bcf, somewhat greater than what traders were expecting, but on closer examination revisions lowered the inventory increase to 36 Bcf. Futures initially rallied, but at the close the expired May contract had settled 3.2 cents lower to $2.036 and June had fallen 4.4 cents to $2.126. June crude oil added 43 cents to $104.55/bbl.

Eastern marketers saw the higher quotes as Nymex-driven. "Dawn moved up with the Nymex. I don't think there was any change in the basis," said an East Coast marketer. "We saw some late strength at the Iroquois border, and it looks a little cooler. Nymex can't just stay in one place all the time. I bought some gas and then resold it back to the same party. Some people thought the market was too strong and sold into it. They got caught and had to cover."

Quotes were higher by double digits at a number of Great Lakes and eastern points. Algonquin Citygate was up by almost 20 cents, while gas on Tennessee Zone 6 200 L rose just by over 15 cents.

On Michcon next-day gas was quoted a dime higher, and on Consumers parcels were up just over a dime.

A Mississippi Valley buyer saw the day's advance as more consistent with moves in the futures market. "You would think from a fundamental standpoint prices would be headed lower, but technicians would tell you that some kind of rebound is due, oversold conditions and things like that. Everyone is trying to guess the bottom of the market, and $2 is a good psychological support number."

The buyer said they were not marketers and were now in the mode of buying gas during the spring and summer months for winter heating requirements. "April is a challenging month. It's still cool and we can't inject a whole lot, but we liked buying the sub-$2 gas while it lasted."

He added that the current steep contango in the market was definitely a help to the company's gas buying. "That helps us fill gas early in the period and we have some time option when we fill."

Gas on Texas Gas Transmission SL, Trunkline E LA, and ANR SE all rose by by approximately a dime. Deliveries to the Henry Hub were just more than a dime higher.

Rocky Mountain points posted solid gains also. The Cheyenne Hub and CIG Mainline were seen more than a nickel higher, and Opal added almost a dime.

For all the fanfare created by a supportive inventory report, May futures ended up settling in the loss column. The EIA reported a build of 47 Bcf, but on closer examination writedowns of prior period additions left inventories just 36 Bcf higher, much less than what the market was expecting.

Confusion reigned when the number first hit. "The revisions don't get posted in the ring," said a New York floor trader. "We actually heard about it from one of our customers. We are looking at this thing rallying and asking why when we find out the number was to the downside. People expected a build of 47 Bcf and it was actually 36 Bcf. We got the revision [in the inventory number] the market rallied up to $2.18 and here we sit right at $2. The market fell 15 cents off its high. I think the market is on its way to $1.85."

Analysts were expecting an increase at or less than the five-year average injection of 47 Bcf. IAF Advisors of Houston was looking for an increase of 41 Bcf, and industry consultant Bentek Energy predicted the weekly refill at 38 Bcf. A Reuters survey of 25 analysts and traders revealed a sample mean of 47 Bcf, right at the five-year average, with a range of 33-65 Bcf.

The slimmer-than-expected build raises the question if production cutbacks and lower gas-directed drilling may finally be having an impact.

On Friday Baker Hughes reported that gas-directed rig counts had increased by seven to 631, but the overall trend in gas drilling has remained lower for a number of months, and at 631 the roster of working rigs is a stout 28% less than a year ago. Analysts readily admit that the lack of correlation between a lower rig count and continued high production is counter intuitive, and Thursday's report hints that the lower rig counts may finally be translating into lower production if not immediate higher prices.

Longer term, futures traders were encouraged by Wednesday's advance and were looking for higher prices. Tom Saal in his work with Market Profile identified Wednesday as a "neutral day" and in the parlance of Market Profile a neutral day is characterized by trading in both directions outside the first hour of trading. "A neutral day with a settlement at the high end of the day's range means we are going higher tomorrow [Thursday]," he said.

He also noted a shift in market composition. "The Commitments of Traders report has shown that the commercial hedgers, aka producers, have been selling the bananas out of this market, so sooner or later they will be doing some short-covering," said Saal, a vice president at INTL Hencorp Futures in Miami.

"Funds have actually been doing some buying, and the producer selling has overwhelmed the fund buying. This kind of behavior is unusual. It's a form of divergence and its just a matter of time before things come around."

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