The April natural gas futures contract dropped 17 cents Tuesday to close at $7.533 in its first regular session as prompt-month as traders brought the contract more in line with March's $7.547 expiration a day earlier. Traders see gas futures in an in-between phase, where the winter season is approaching its end but summer temperature and hurricane forecasts have yet to really hit the radar. Some market experts are eyeing an end to the weather-driven advances of the last few weeks and anticipate a robust injection season.

Calling Tuesday's natural gas futures activity a "pitched battle," Citigroup analyst Tim Evans said the April contract was pretty volatile and choppy. "We swung back into positive territory in the middle of the session in sympathy with the recovery in the crude futures price, but then we dropped back down. The U.S. stock market did not have a good day and maybe that has some people thinking that natural gas demand may weaken. On Tuesday, we really changed the tone or character of the futures market every two hours.

"It seems the market has become a lot more subtle than at any time since November," he said. "December into January had a clear direction due to warmer than normal temperatures and late January into February also had a clear path behind colder than normal conditions. Right now, there is nothing nearly as dramatic coming our way. Seasonally the demand for natural gas is declining, which removes some fundamental support for the market, but it also isn't exactly headline news. Seasonal adjustment should take that right out of the equation."

The analyst noted that the current market makes it difficult to develop a clear fundamentally-based bias in one direction or the other. "From my own perspective, I'm not sure there is a good trade here. You might make money from being long or short, but given the magnitude of the risks in this current market, I don't know that it is a good risk-adjusted prospect," Evans said. "You can put a position on either way, but the question is how much are you going to risk on the trade. Are you going to risk 50 cents to make 50 cents? Those kind of odds don't appeal to me."

Evans added that despite the 27.3-cent drop in the April contract over the last two sessions, the market is still within the recent broader trading range. "It is not really clear to me that we have broken any kind of an established equilibrium," he said. "Could prices snap back to the upside with a 20-cent rally? Sure it could, because what we are really talking about here in the short run is simply trade-flows. It is just flows of buying and selling right now, not necessarily because the weather outlook was more bearish than it was yesterday or anything like that. People who were selling Tuesday could just as easily change their mind Wednesday and buy it back. In fact, they probably will."

The weak expiration of the March contract didn't breach any significant technical support zones, but traders, nonetheless, have been taking the opportunity to sell what they see as an elevated market. "Overall we haven't broken through any support zones, but we [were] sellers all last week," said a Denver risk manager. "We have been sellers of the summer strip and also some of the winter 2007-2008 strip."

He added that he didn't think prices would get much higher with more seasonal temperatures expected for the end of the heating season. "There seems to be a consensus that severe cold is done for the year, and the industry should go into the summer with above average storage, and prices at these levels should still encourage plenty of drilling and result in some nice builds," he said. "We have a feeling that it's going to be hard for traders to push the summer prices higher during the injection season. Winter prices of next year, however, still have some room to move higher."

In its morning six- to 10-day forecast, MDA EarthSat predicts a warming midsection of the country and a cooler East. "Better model agreement is noted this morning as more warming expands into the middle third of the nation during the course of this period. Early period cooling should shift east and weaken per the latest model consensus," the forecaster said. It predicts low temperatures next week in New York City in the upper 20s and low 30s, or about three to five degrees below average.

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