After a quick check to the downside failed to attract much profit-taking, natural gas futures continued higher Tuesday amid waves of local short covering and speculative trader new long accumulation. With that the June contract rebounded easily back above the $6.00 level, advancing 32.5 cents to close at $6.308.

Market watchers were quick to point to fund and local buying as a reason for the huge price increase. “This has been a textbook example of long accumulation by fund traders,” issued Tom Saal of Commercial Brokerage Corp. in Miami. “We saw them attempt the downside last month when prices were below the 40-day moving average. But each time they sold the market, there were buyers waiting to support prices. Now [the funds] are buyers and there are no sellers willing to step up,” he explained.

Saal went on to explain that whereas utilities, industrials and LDC’s were happy to hedge a portion of their supply at prices in the low $5.00s last month, producers are not yet willing to sell with any conviction. As a result, the buying by funds is going basically unchecked.

However, funds were not the sole buyers out there Tuesday. Also a factor were local traders, who shorted the market on the open and were subsequently forced to cover their positions. At 101,959, estimated volume was a testament to the frenzied trading activity Tuesday.

Looking ahead, there is no clear indication how far and how fast prices could climb. A quick look at the most recent Commitment of Traders report shows that as of May 6 non-commercial traders as a group were basically flat. However, historically they are typically either net short or net long and have been known to be as lopsided as 60,000 contracts in one direction or the other. And prices usually move in the direction of that position.

For example, funds were net long more than 32,000 contracts in February when prices peaked at more than $10. A year earlier in February 2002 when prompt month futures dipped to $1.85, the non-commercial segment of the market was net short more than 50,000 contracts. Fresh COT data showing the market’s activity through Tuesday will be released Friday and market-watchers are anxious to know just how long the funds have become.

In the meantime, traders will get to chew on some good ol’ fashion fundamental data. The EIA will release its weekly storage report Thursday at 10:30 a.m. EDT and market watchers are once again this week calling for a 75-85 Bcf refill. If realized, an injection of that magnitude would slightly outdistance the year ago analog of 62 Bcf as well as the five-year average of 75 Bcf.

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