Even with July crude futures continuing to explode higher, June natural gas futures values probed the downside in morning trade before limping higher to close at $3.970 Wednesday, up 5.6 cents from Tuesday’s finish.

Front-month crude futures made another bullish statement on the day as they gained $1.94 to close at $62.04/bbl. Some traders said natural gas futures are failing to follow crude’s enthusiasm because of a difference in fundamentals.

“I really think the recently completed rally in natural gas was fund money coming into commodities,” said Steve Blair, a broker with Rafferty Technical Research in New York. “I don’t think it held in natural gas because the fundamentals are still so weak, while crude’s fundamentals are a little bit stronger.

“We’ll probably be trading in this $3.500 to $4.500 trading range for a bit, but we also see pretty good support coming in at $3.630. Even if we break that, I’m not sure we’ll be seeing a test of the $3.155 low anytime soon.”

Citi Futures Perspective analyst Tim Evans agreed that natural gas is fighting its fundamentals. “It is attempting to spring back from a new overnight low on the back of the rally in crude oil, but is having a more difficult time forgetting that its year-on-five-year average storage surplus remains in an uptrend,” he said. “We’re forecasting a relatively neutral storage injection of 88 Bcf in Thursday’s [Department of Energy] storage report, but the reports to follow look clearly bearish. With some indications that natural gas production is beginning to slip, the natural gas market may be in transition toward what could be a second half uptrend, but for now we see the market vulnerable to periods of weakness, until it can point to a downtrend in the storage surplus.”

Going into Thursday morning’s natural gas storage report for the week ended May 15, Bentek Energy said its flow model is indicating a 92 Bcf build.

Some traders expect a little more of a dip before seeing another rebound. “I think you are looking at some pretty good builds for the next couple of weeks, and the market is reflecting that earlier,” said a New York floor trader. “It looks like there might be another 20 cents to the downside… After that maybe a bounce higher by Friday and early next week. It looks like we are going to test $3.50 before the market holds.”

The trader said at this point he feels the $3.155 low from late April is safe. He said that while he hadn’t heard any suggestions that the market was going to test the recent lows of $3.155, he had “heard talk of $3.450 and $3.500, but I expect some short-covering and the market to hold above $3.500. With the kind of weather we have been having and the supplies we’ve got, the market could test down to $3.15 in the next five or six weeks, but I look for $3.500 to hold in the meantime.”

The recent advance from $3.155 to $4.575 and subsequent drop has some market observers thinking trading dynamics are about to change. “This price rally and subsequent decline are providing portents of a much more volatile trading environment in this market than was the case through most recent months when prices were generally ratcheting lower in orderly fashion,” said Jim Ritterbusch of Ritterbusch and Associates. “Although some further consolidation could develop through the balance of this week, we look for a soft spot market environment to set the stage for a weak expiration of June futures a week from [Wednesday].”

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