April natural gas rose Monday with traders seeing a shift to natural gas as Japan copes with possible nuclear meltdowns resulting from earthquake and tsunami damage. Technical strength was also noted. At the close April natural gas was 2.5 cents higher at $3.914 after trading as much as 16 cents higher at the open, and May added 3.1 cents to $3.976. April crude oil gained 3 cents to $101.19/bbl.

“Natural gas is building a base,” said a California broker.

“Everybody is looking at the nuclear situation. There is the concept of LNG from the U.S. going to Japan in a month or two, but when you get people saying ‘I told you so. This stuff [nuclear] isn’t safe’ it’s just going to cause a political advance in natural gas prices. The idea of April trading up 24 cents in the last couple of days doesn’t make any sense, but longer term it looks strong from a political angle,” he said.

The broker cautioned that “the advance today is just a warning to not be short natural gas because everyone is going to be angry with anything that has a nuclear rod in it. It will be the new fuel of choice. At least it doesn’t glow in the dark.”

“My clients are only worried about natural gas going higher, to $8 or $10. When you are at $3 to $4 they just buy out-of-the-money call options; if the volatility gets higher and we get into a new trading range then clients will use call spreads, but right now we are not there yet,” he said.

The Commodity Futures Trading Commission in its weekly Commitments of Traders Report disclosed that directional traders at both the IntercontinentalExchange (ICE) and the New York Mercantile Exchange reduced holdings of both long and short futures and options. For the five trading days ended March 8, managed money accounts holding long futures and options (2,500 MMBtu per contract) at ICE lowered exposure by 24,415 contracts to 273,872 and short holdings rose 26,159 to 87,033.

At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) fell 947 to 135,803 and short positions fell by 17,426 to 294,430. When adjusted for contract size, long futures and options at both exchanges fell 7,051 and shorts contracted 10,886. For the five trading days ended March 8, April futures fell 0.9 cent to $3.864.

If nuclear difficulties in Japan were not enough warning to natural gas bears, top traders are viewing last week’s 8.0-cent weekly rise in the April contract as a shot across the bow to the bearish camp. Jim Ritterbusch of Ritterbusch and Associates said he looks “for the large speculators to become more selective in approaching the short side by awaiting price rallies toward the $4.15 area in the May contract to establish fresh holdings.” Earlier short targets are off the table for the moment. “We had been alluding to the possibility of a downside move to the $3.50-3.60 zone per nearby futures as we suggested sales of the May futures at the $4.00 level or above. Last week’s lack of downside follow-through amidst seemingly bearish news now places our prior downside target out of reach in our view.”

The market’s firm tone on Friday gave the bulls a little breathing room, but analysts say the market has a lot of work to do to indicate any trend higher is in place. “To indicate $3.731 marked the end of the move down from $4.879, both $4.021-4.056 and 4.136 must be decisively exceeded,” said Brian LaRose, technical analyst with United-ICAP. “To indicate the move [lower] from $4.879 is still in progress, a decisive break below $3.781 is needed. Clear resistance and a test of the 4.305-4.344 area would be expected next. Sink below support and natgas would have room down to $3.568-3.509-3.459.”

Tudor, Pickering, Holt Securities Inc. of Houston said in a recent note to clients that “it’s hard to like gas in the near term. Too many rigs and too much gas.”

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