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Western, Eastern Points Gain, But Texas Mostly Flat; Futures Firm

Nationwide natural gas prices rose on average by three cents Monday as firm West Coast power prices helped boost interest in next-day gas, and eastern locations were led by a key Marcellus point. Futures prices gained on light volume as bulls were encouraged by the market's ability to hold $2.30. At the close of futures trading June had risen 5.7 cents to $2.336 and July was up by 5.1 cents to $2.422. June crude oil continued lower dropping 55 cents to $97.94/bbl.

Leading the day's advance of actively traded locations was Tennessee Zone 4 Marcellus with a gain of nearly 20 cents. "There is a little bit more demand, and some of the points people were able to take their gas to on Tennessee were open for some of the electric utility buyers," said an eastern marketer. "It's all a function of Con Ed allowing gas to come into their system there. It could also be that production is down a bit also."

He added that prices on Friday may have been a little depressed. "Nobody is going to buy gas for a three day weekend period if they think they will only burn one day."

Other eastern points were also strong. Gas delivered to Iroquois Waddington and deliveries to Algonquin Citygate were both higher by a couple of pennies. Tennessee Zone 6 200 L was up by more than a nickel.

Out west next-day gas at points delivering gas to California firmed as electricity prices rose. InterconitnentalExchange reported that NP-15 next-day locational marginal prices (LMP) rose $2.27 to $27.27 and power to SP-15, and SP-15 next-day LMP gained $2.22 to $31.54.

Quotes at Kern River Delivery Point rose almost 15 cents and gas at Opal jumped a dime. CIG Mainline was higher by 8 cents.

Texas points proved to be laggards. Carthage fell a couple of cents and Katy was flat. NGPL S TX, however, rose a few cents.

Natural gas futures moved higher on nominal volume. "We haven't traded under $2.30 for most of the day, and that is a positive sign for the market," said a New York floor trader.

Directional traders abandoned short positions and added length according to the latest report from the Commodity Futures Trading Commission. In its May 1 Commitments of Traders Report it showed a concurrent contraction in short futures and options and an increase in long positions. At the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) rose 10,361 to 654,520 and short contracts fell 25,807 to 143,695. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) increased by 1,438 to 207,489 and short positions fell by 4,797 to 309,249. When adjusted for contract size long holdings at both exchanges increased by 4,028 and short positions fell by 11,249.

For the five trading days ended May 1 June futures rose 30.8 cents to $2.371.

Risk managers sense that the tide may be turning in the natural gas market. "It's difficult to say what has changed, but the psychology seemed to change this past week. There was more talk of a market bottom than we have heard in quite some time," said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm.

"We don't disagree, but on a trade basis we would be cautious. There is a very good chance that the recent rally was just a combination of short-covering and a lack of selling after the expiration of the May contract. We do believe there are a lot of positives building in the gas market. Demand is on the upswing and will most likely continue to increase, especially at these price levels. At current price levels, especially if crude oil breaks and liquid prices decline, we could very well see production start to decline.

"On a trade basis, we will hold current positions and will be looking for a good reason to get long (just not there yet). At this time and at these price levels, we are not excited about establishing new hedges here. But we purchased October $2.50 puts to cover the summer strip," he said in a morning note to clients.

DeVooght currently has his end-user and trading accounts standing aside, and producers and physical market longs have hedged the summer strip using October puts purchased at 25-27 cents.

MDA Information Systems in its six- to 10-day outlook shows above-normal temperatures north and west of a very broad arc extending from New Mexico to Minnesota to Massachusetts. Below-normal temperatures are confined to Texas and Louisiana and above- to much above-normal temperatures are expected for California, Nevada and the Pacific Northwest. Nevada and most of California can expect high temperatures from 8 to 14 degrees above normal.

"The models and the forecast offer some good continuity from the Sunday update but come in a bit warmer than the look ahead from Friday. The main culprit of this milder outlook is a weaker blocking signal as the ridge in the Davis Strait [Greenland] looks more fleeting now than this time on Friday. As a result of this, though, we should still see a fair amount of cool air work into the southern parts of the U.S.; the cool air is less impressive. North of this cool area some milder air is expected, especially in Canada. Out West a strong ridge is still expected to build quickly, bringing some strong heat with it," the forecaster said.

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