Unable to maintain the upside momentum that natural gas cash points have enjoyed for most of the last week and a half, averages on Wednesday fell in a big way, which just so happened to coincide with the first significant decline in front-month natural gas futures since the contract rollover on April 29.

Most point averages dropped by double digits for Thursday delivery with at least half of the declines coming in at more than 15 cents. The declines were also evenly spread among regions.

Traders and market watchers were quick to point to the screen as the culprit for the drop. While June natural gas futures only declined by 5.6 cents on Tuesday, the fact that the front-month contract closed at $4.342 after reaching a high of $4.494 earlier in the day was likely all the catalyst cash traders needed going into Wednesday.

“Natural gas markets seemed poised to continue on an upward path but a midday [futures] sell-off reversed the recent trend [Tuesday],” said James Crandell, an analyst with Barclays Capital. “Natural gas has benefited recently from the cold weather that should produce a smaller-than-historical injection in this Thursday’s weekly inventory report, and also from the turn to warmer-than-normal weather forecast to move into the Midwest and eastern states later this month, that could stoke some early cooling demand.”

One Northeast trader noted that “the recent run of strength had to crack at some point,” because the market can’t just continue to go higher, especially with the amount of gas currently on hand and the lack of demand. “We knew this thing was either going to take a breather or correct itself at some point,” he told NGI. “We’ve seen cash averages soar near $5 at some spots in the Northeast over the last two weeks and now we’re down in the $4.60s. Whether Wednesday’s action turns out to be a speed-bump on the run to higher prices, or a direction change, remains unknown. We’re really at the mercy of the futures market here, so it’ll be interesting to see if June returns to its recent comfort zone around $4 or whether it ends up breaking out above $4.50.”

The June natural gas futures contract found itself a lot closer to $4 than $4.50 following Wednesday’s regular trading session. The prompt-month contract declined by 18.4 cents to close at $4.158 (see related story).

The Energy Information Administration’s storage data Thursday morning for the week ending May 14 is expected to reveal that less gas was squirreled away last week than last year’s week or the average of the last five years for the week.

Bentek Energy’s flow model is projecting a 76 Bcf injection, which would bring inventory levels to 2,165 Bcf. The research firm expects a 37 Bcf addition in the East Region, a 25 Bcf addition in the Producing Region and a 14 Bcf addition in the West Region.

“The East Region is the big swing region again…,” Bentek said in its weekly storage outlook, noting that its “storage sample in the region decreased by 10 Bcf, due to colder temperatures in the Midwest and Northeast.” The company added that storage activity in the West and Producing regions remained relatively flat from the prior week.

“With the exception of this week, storage injections have been higher than the five-year high since the injections season started in April,” Bentek noted. “U.S. storage inventory levels have been setting new record highs every week.” The company partially attributed the higher injections to new storage facilities being placed in-service, with most of the new additions during the last couple of years occurring in the Southeast/Gulf region.

The Labor Department’s Consumer Price Index (CPI), which is seen as a measuring stick of inflation, has increased 2.2% over the last year, but declined during April 2010, the department said. CPI fell by 0.1% Wednesday when analysts had been expecting an approximate 0.1% jump. The Labor Department’s report attributed the decline last month to a 1.4% drop in the energy index, which is still 18.5% over last year’s level.

“It is clear from [Wednesday] morning’s CPI report that deflation is the greater risk for the world economy .how ‘unexpected,'” surmised Brian LaRose, an analyst with United-ICAP. “If this is only a glimpse of what is to come as world economies slow down and try to tackle their debt problems, there is still much pain to be felt. Based on the nature of the price action from the highs, it is our opinion that the energy and equity markets have peaked. However we still need to break key support to confirm that is the case. So while we favor selling rallies at opportune times from here on, we would also recommend working tight stops.”

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