The gas futures market had one of its more amazing weeks with an enormous upswing that shot April futures from a low of $2.290 the week prior, all the way up to last week’s high on Thursday of $2.820. On Friday, April prices inched up 4 cents to close out the week at an even $2.800/MMBtu. Despite the strong rally, however, some observers see overbought conditions leading to a pullback; it’s just a question of how much and for how long.

Futures were propelled higher by a wide variety of factors, but constructive technical indicators led the charge, prompting a wave of short covering by funds. Fundamentals such as the recent cold weather, a rally in the nearby hydrocarbon complex due to potential military movements against Iraq, favorable reports on the economy recovering and a relatively large 132 Bcf withdrawal from storage helped justify the run-up.

“Natgas, along with the rest of the energy complex, resembles a runaway freight train, and it’s tough to be anywhere but on board,” said Jay Levine of Advest Inc. “Better to be watching from the station than standing on the tracks.”

According to many technical observers, it was high time for a breakout. “It was way overdeveloped on the downside. It was just a matter of when it was going to blow,” said Ira Hochman of New York City-based Trot Trading. “Obviously on Wednesday, there was nothing but buying in the market. Even before the [storage] report, every half- hour bar was higher than the previous one. There were no sellers in the market. Once it got above the $2.51 area, it was sayonara.”

The American Gas Association report of a 132 Bcf withdrawal added a little fuel to the fire. While it was inside the 110-160 Bcf range of expectations, it was much higher that the prior week’s 64 Bcf withdrawal and last year’s 73 Bcf drawdown.

After filling in a nagging $2.51-55 chart gap on Wednesday, the April contract rallied at the close to notch a new eight-week high at $2.585. However, that was only the beginning, because the contract gapped higher Thursday morning as buy-stops initiated a wave of computer-generated fund buying. Light profit-taking at the closing bell shifted the prompt month off its $2.82 high. It closed 19 cents stronger on Thursday at $2.756 amid extraordinary estimated volume of 158,816.

By Friday, the futures rally was obviously a “little overdone,” said Hochman. “It wouldn’t surprise me if it pulls back a little bit here. I could see it pulling back to the $2.50 area again.” But it could test the $2.92-$3.02 area before that pullback, he said. That area was rejected in December and still looks attractive. “We may get a little test up there before it breaks. It could happen later today or early next week,” he said Friday.

Looking even further ahead, Hochman sees $3.44 as “a real good target” on the technical charts over the next couple of months. “We need to build a little bit, but I think the market is reconnected. The top of the value is going to be somewhere in the $3.25-3.44 area. It’s just a matter of pulling back and letting the market develop and digest and do its work.”

In the short term, Hochman doubts prices will fall back below $2.50. Others, however, aren’t so sure. Tim Evans of IFR Pegasus, for example, believes the market is now significantly overvalued by about $1 and could come crashing down.

“I’m not convinced yet that we’ve seen a bottom on the spot continuation chart,” said Evans. “The bottom right now was set last September; the October contract expiration went down to $1.76. At the end of January, we got as low as $1.85. I’m not sure — and apparently the [EIA’s] not sure either — that we won’t see those prices again.” EIA said in a forecast last week that it expects prices below $1.80 this summer.

It’s hard to believe that, Evans admitted, when you look at current forward valuations — with August at a high of $3 Friday and next January at $3.655.

“We had a short-covering rally based on a short-term event. But now we’re back into some prior chart congestion, so from a technical standpoint I think we are about as overbought as we are going to be able to manage becoming without anything seriously fundamental to drive this,” said Evans. “The other thing is we don’t have much time left to the heating season. There are only going to be a few more weeks of withdrawals. Next week’s withdrawal probably will be more than the 75 Bcf from a year ago — probably somewhere in the 110-130 range — which is all right, but the one after that is going to be 60 Bcf and then it’s going to be over. What are we going to be left with? Well, about 1.5 Tcf of gas according to the DOE.”

Storage now stands at 53% full with 1,748 Bcf of working gas versus 786 Bcf at the same time last year and 1,178 Bcf on average over the last five years. Furthermore, the Energy Information Administration said last week it expects storage to end the heating season at 1,541 Bcf, more than twice the 742 Bcf at the same time last year.

Evans sees failed resistance at $2.58-60 as the first support level, followed by additional buying at $2.46-50 ahead of last Wednesday’s $2.435 low.

Jay Levine of Advest said he expects when last week’s “smoke clears,” April probably will pull back at least to its breakout point in the mid $2.50s. “Should it break below this, I’d expect support to be in the low $2.30s, followed by the low $2.20s/high teens.”

Longer term, Levine expects levels as high up as $3.80, “believe it or not,” over the next three to six months. “It may seem impossible [that’s the fundamentalist on my shoulder], but it’s possible. Then again a rapid decline, blowing through supports, and the recent sharp movement up becomes a quick recent memory.”

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