Coming off the long holiday weekend, natural gas futures traders on Monday were just as directionless as they had been the previous week. May natural gas bounced within a 15-cent range on the day before settling at $7.546, down 6.1 cents on the day.

Traders said the market still seems comfortable within its recent trading range, noting that some piece of fundamental news will need to come along in order to move it in one direction or the other. "Ultimately we had an inside day Monday where we put in a higher low and a lower high relative to Thursday's trade," said Tim Evans, an analyst with Citigroup in New York. "It appears that there is still no clean decision on whether we are going higher or lower here."

The real action on the day was occurring in the crude futures pit, where the May contract dropped $2.77 to $61.51/bbl. Evans said he was not surprised that natural gas futures did not follow crude's lead. "On more of an ongoing basis natural gas often does react to swings in crude, but I think ultimately natural gas has to revert back to the more direct natural gas fundamentals," he said. "We have an inventory imbalance with crude storage at Cushing, OK being basically full. While the hostage story is a nice excuse for taking a view on the market, if you want to really know why the May WTI futures are trading $5 under the Brent mark or $2.80 under the June contract, that is not a function of the hostages coming home. That is a function of too much physical crude being available for delivery against the May futures."

Looking ahead for natural gas futures, Evans said the storage situation could offer some market-moving data next week. "In the data for this week revealed in next Thursday's [Apr. 19] report, some pipeline data analysis firms are calling for a token withdrawal. However, when you look at the week-to-week swing in heating degree day accumulations and you look at the absolute level of heating demand here, we could see a much larger withdrawal for the week ending April 13."

Evans added that with this week expected to be the coldest on record since the second week of March, there is potential for a "bullish surprise" on Thursday of next week. "The expectation of some within the market is that maybe we will get one week that is a token net withdrawal from storage. However, the weather numbers show that the withdrawal could be more like 50-60 Bcf. We could see a swing from a 58 Bcf build to a 58 Bcf withdrawal in the course of two weeks. There is potential for natural gas futures to soar to new highs off this current cycle of cold."

Addressing the market's recent fight with inertia, Evans said he thinks the funds certainly deserve a closer look. "In spite of the fact that the market currently seems relatively complacent, the funds seem like they want to just sit on their short positions and not cover, keeping the faith that the seasonal warming trend will be enough to hand them a paycheck," the analyst said. "I don't know, I have never been in a situation where the market has handed me a paycheck without doing a little more homework than that. It appears they are saying, 'I want to be short because May will be warmer than April.' Yeah, but every May is warmer than April and yet prices have a seasonal tendency to rise during this period. Maybe the funds get lucky, but once they are heavily short or heavily long, you need the fundamentals to really validate that positioning in the market to drive prices further in the direction that they are looking for. The fact that we have already absorbed a significant cycle of fund short-selling without driving the market down suggests that the underlying fundamentals here are pretty good."

Risk managers sense a certain ambivalence in the market. "It seems that the gas market is content to hang out around current levels," said Mike DeVooght, president of DEVO Capital Management. He is of the opinion that at least for the next several weeks, the petroleum complex will be the driving force behind a move in the natural gas market. "On a trading basis we will continue to hold our current light short position," he said.

DeVooght currently sees no reason for either trading accounts to be in the market or for end-users exposed to higher prices to hedge. DeVooght advised producer clients Monday morning to hold short a May-October strip at $8 for 25% of production and a summer strip short at $7.600 for an additional 50% of production. He also advised staying short a winter 2007-2008 strip at 15% of production.

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