Starting the week with more of a whimper than a bang, April natural gas futures on Monday traded within an anemic 6-cent range between $6.820 and $6.880 before settling at $6.847, down 7.7 cents for the day. While activity in natural gas ring was muted, the front spread in crude futures continued to widen to eye-opening levels.

"Things were really quiet in the natural gas ring on Monday. It was too quiet," said Steve Blair, a broker with Rafferty Technical Research in New York. "Pure natural gas traders could have stayed home and taken a long nap without missing a thing. It is almost like the attitude of the natural gas futures market is blase."

Crude futures market was active as the April-May spread "continued to explode" on Monday. The April contract, which expires Tuesday, closed 52 cents lower at $56.59/bbl, while the May contract gained 12 cents to finish at $59.70/bbl, pushing the spread to $3.11. "In the last couple of years it has been unusual to see the front spread in crude larger than $1.50. Last week we were well over $2 and on Monday we blew it even wider," said Blair. "I don't see the reason for it at this point."

Turning attention back to natural gas, Blair said the market is approaching a crucial test. "We are getting really close to our major support numbers at $6.800 and $6.760 and we will see what happens when we get to those levels," he said. "Now that we are getting into the shoulder month of April, I think the market is a little bit directionless. The day's trading range was a mere 6 cents, while most of the day we were within a 4- to 5-cent range, so there is not a whole lot of action out there. I think we could see some reactionary buying down at the $6.760 to $6.800 level. However, if we get below that, there is a fairly significant drop in terms of technical support numbers. We're talking about a 40- to 50-cent fall-off if we get below there. If the market is going to continue to remain in this trading area, it is going to have to hold that first line of support."

Blair said he would not be too surprised if we did trigger that drop. "We are obviously done with the significant withdrawals from storage and while we are under last year's storage level, which I still call an aberration, we are still very well off entering the injection season unless we get a significantly hot spring and early summer."

While the first half of the week is expected to be chilly in key eastern and Midcontinent regions, AccuWeather said it sees that changing for the week's second half. "Although the week will begin with chilly temperatures across the Great Lakes and Northeast, warmer air will return," said Brian Frugis, a meteorologist with AccuWeather. "By midweek, the jet stream will begin to lift to the north, allowing warmer air over the southern Plains to surge to the north and east. This will mean 60s and 70s for a good portion of the nation east of the Rocky Mountains by the end of the workweek. Meanwhile, the record heat across the desert Southwest will come to an end, as the jet stream plunges south across the West. While it will not be cool or cold by any stretch of the imagination, it certainly will not be the record-breaking heat that the region experienced last week."

Prior to Monday's market action, some top traders favored a modestly bearish stance in anticipation of prices grinding lower. "It's that time of the year when the supply-demand factors in the gas market take a back seat to outside factors such as moves in the (petroleum) complex and what the U.S. economy is expected to do in the future," said Mike DeVooght, president of DEVO Capital, a Colorado trading and risk management firm. With the heating season winding down and summer weather and tropical forecasts weeks away, DeVooght looks for the market to soften. "Unless something changes significantly and soon, the current supply-demand situation will not provide the gas market much support. On a trading basis, we are looking [for] the gas market to trade sideways to lower and will hold current positions."

DeVooght advises trading accounts to roll a short crude and long natural gas position from April to May, and end-users are counseled to stand aside. Producers are advised to hold short an April/October strip at $8 for 25% of production, and stay short both a summer strip at $7.60 for 50% of production and a winter 2007-2008 strip at $9 for 15% of production.

Oil markets are trying to determine if weakness in overseas equity markets is likely to lower demand and ultimately prices as measures are taken to cool economic activity. Last week, China's central bank raised rates for the third time in less than a year in an attempt to tighten up credit and investment and prevent the world's fourth-biggest economy from overheating. The bank raised its one-year yuan lending and deposit rates by 0.27 of a percentage point. That puts the mainland's lending rate at 6.39% and the deposit rate at 2.79%. Friday the Dow Jones Industrial Average lost 49.27 to settle at 12,110.41.

Phil Flynn of Alaron is long May natural gas from approximately $7.300 with a stop loss at $6.700.

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