While most traders were expecting an easy session to close out the week following expiration of the May contract on Thursday, Friday instead brought a 20-cent-plus rally in June natural gas and a significant gain in crude futures, along with the Amaranth flashback-producing news that the Bank of Montreal (BMO) had lost C$350 million to C$450 million recently in wrong-way natural gas trades. June natural gas finished at $7.831, up 22.9 cents from Thursday and 31.7 cents higher than the previous week's close.

The bank told investors Friday that the losses were due to "out-of-the-money options," warning that more related losses could be coming (see related story). While the losses were just a fraction of Amaranth's $6 billion-plus loss in September 2006, some market participants said the news could have factored into the market's significant rally Friday while others dismissed the idea. One Midwest broker joked that unless BMO had "similarly bad" positions in crude, a connection between the news and the run-ups was not "very likely." June crude on Friday headed higher in unison with natural gas, putting in a high of $66.70/bbl before closing at $66.46/bbl, up $1.40 from Thursday.

"I think what we saw Friday was mostly a technical rally," said Tom Saal of Commercial Brokerage Corp. "You're supposed to get the fireworks on expiration, not on the day after like we saw here. What we saw was a continuous buying spree throughout the day, so people were probably trying to get out of their contracts. It doesn't look like new buying.

"It looks like people aggressively buying the market and getting out of short positions. I think there was a fair amount of fund short-covering on the day. However, it is important to note that we did not make it to $8 yet. We will have to see what happens next week and whether that resistance level can continue to hold up."

As for the possibility that the BMO news triggered buying, Saal said it is unclear what people would have to gain from the futures rally in relation to the bank's losses.

Rafferty Technical Research broker Steve Blair said that with the bank citing out-of-the-money options for its losses, it would appear "it paid all of that premium with no way to get it back." He added that the news certainly could be somewhat responsible for the rally in natural gas futures Friday, but it really depends on what their real positions were.

"If they were long options, then it would not make sense for the market to run up on that because they have nothing to get out of," he said. "It really depends on what their real position was. Were they long calls or short puts? If you're long puts you want volatility to drop, but if you're short puts you don't. Maybe they were long calls where they paid a bunch of premium, volatility dropped and they couldn't recoup it. Something significant had to happen for them to lose that type of money."

Looking at the natural gas futures market on the whole, Blair said traders currently find themselves back up at the high end of the recent range. "I think futures continue to play back and forth in this congestion range between $7 and $8. I think some of Friday's rally was technical in nature; some of it was continued strength in petroleum, and then it is also possible that the market is trying to put this in the bank's face. All three of these factors could have teamed to run this market up."

As for resistance, Blair said it first comes in at $7.920, followed by $7.950 to $8.050. "If we get into that $7.950 to $8.050 range again, then we will probably come back off again. If we get back near $8, then we should follow the recent pattern and fall from there. If we get through $8.050, our next major resistance level is not for another 35-40 cents. There remains a lot of strength in crude and the products, which I believe is continuing to keep natural gas on the firm side."

Temperatures will exceed seasonal norms across most of the U.S. through the first week of May, and MDA EarthSat in its six- to 10-day forecast shows above-normal temperatures extending from Utah to Ohio with a slight cooling in the Northeast. The 11- to 15-day forecast shows an expanded area of above-normal temperatures from Nevada to New York. Thus, with the warmer temperatures demand for gas will typically decline at this time of year. Temperatures are warm enough to stifle heating demand, yet not so warm that power demand increases to meet air conditioning needs.

Jim Ritterbusch of Ritterbusch and Associates said fundamental weather factors would normally be "conducive to a near-term price correction of as much as 20-30 cents," but he sees the natural gas market as deriving most of its near-term pricing guidance from the petroleum complex.

"Here is where we have a problem. We have been suggesting a bullish trading posture within oil futures. Consequently, we may need to raise our suggested entry point (for natural gas) as far as the buy side is concerned unless the June contract dips to below the $7.40 area during the next couple of sessions," he said.

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