After showing early signs of a rally, the expiring April natural gas futures contract on Monday resumed the downtrend of the last few months, locking in a low of $3.820 before going off the board at $3.842, down 3 cents from Friday’s close. The May contract finished the day at $3.916, down 1.4 cents from Friday’s finish.

Those who read the market’s tea leaves know that Monday’s low reached a key price level. Not only does $3.820 mark a new low for the greater down move, it has also been singled out as an important support level. After $4 was breached last week, a number of traders said the next target was $3.820 because it represents a 61.8% retracement of the September-to-January move higher (see Daily GPI, March 25).

While attributing the early Monday strength to a bit of profit-taking and bargain-hunting within the market, Citi Futures Perspective analyst Tim Evans said the bulls still don’t have too many arrows in their quiver.

“”Beyond the risk/reward calculation shifting at these sub-$4 values…we don’t see any particular support, with the temperature outlook still bearish overall over the next two weeks,” Evans said. “The larger question is just whether the coming of spring has been fully discounted and whether the price decline of the past six weeks overshot the fair value on the downside.”

Market technicians point to the virulence of the current price downtrend and recent breach of $4 “support,” and fundamentals followers demonstrate that with upcoming shoulder-month weather, a soft economy and comfortable storage levels. With those dual-action factors in play prices have nowhere to head but lower, they say.

Others point to the need for a significant restructuring of the exploration and production (E&P) sector to take place before supply can become balanced with demand. “New money is increasing production, which is driving down prices, which will eventually drive the higher-cost, leveraged producer out of the market,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. He added that “a correction, as described to me by an old wildcatter, is a period when the production comes back to its rightful owner (I’m not sure who the rightful owner is). But I do believe we are going through a major correction at this time. There are quite a few leveraged E&P companies that will not be around in the future.”

DeVooght advises clients to hold on to current short positions established several months ago. “There is a very good chance this natural gas bear market will not be over until we lose more of the leveraged gas E&P players. We will hold our current short positions.”

He said trading accounts and end-users should stand aside, and producers and those with exposure to lower prices should continue to hold a 12-month $5-8 collar from last August established at a cost of 35 cents and also hold a 12-month $5.50 put option against the sale of a 12-month $7.50 call initiated in December.

Traders concerned with the purely directional component of the natural gas market and not attempting to offset a physical position favored exiting earlier long positions and increasing short exposure, according to government figures. The Commodity Futures Trading Commission in its weekly Commitments of Traders Report for the week ended March 23 said traders at IntercontinentalExchange decreased the number of long futures and options (2,500 MMBtu) by 47,541 contracts and increased the number of short futures and options by 5,695. At the New York Mercantile Exchange long futures and options (10,000 MMBtu) rose by 2,221 contracts and shorts added 1,542. After adjusting for contract size (10,000 MMBtu), total long market positions decreased by 9,664 and shorts increased 2,966. For the five trading days ended March 23, April futures fell 21.7 cents to $4.130.

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