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Futures Finish Lower, But $10-Plus Prices Could Return This Summer

After a week where the natural gas futures market went in a different direction every session, trading on Friday broke the mold as the session added to Thursday's losses. The May contract closed out the week at $9.322, down 9.5 cents from Thursday's finish and 47.8 cents lower than the previous week's close.

Mixed fundamentals and chart patterns have traders and analysts continuing to wrestle with predicting the market's next move. While bulls applauded Monday's (March 31) run-up to $10.190, the bears were quick to latch on to the fact that the move failed to reach the previous high and prices ended up retreating. The same was true with the 29 Bcf draw storage report for the week ended March 28. Bulls keyed in on the fact that the withdrawal was bullish compared to both the 2 Bcf five-year average pull and last year's 35 Bcf injection. In defense, the bears touted that the number was on the low side of industry withdrawal estimates and that the 1,248 Bcf in underground storage as of March 28 is still 6 Bcf above the five-year average of 1,242 Bcf.

"While trading was mostly quiet Friday, we did close very near the low," said a Washington, DC-based broker. "It wasn't a very enthusiastic close if you were on the long side, but if you were on the short side, then it was kind of nice. Our view is that the peak of $10.190 that we made on March 31 completed a quasi-double top on the continuation charts. It also signified a key failure at running up to the old high of $10.294 from March 14. We are bearish here for a number of reasons. Whether it is the warming eight- to 14-day forecasts or the less than robust withdrawals, those things seem to be dominating the minds of traders at this moment."

Looking at support lines, the broker said the first target comes in near $9, but the first major support line lies at $8.660. Below that, he sees a test of the $8.100 to $8.180 area. As for the market concerns that funds could launch a round of massive short-covering at any time that could produce a spike into the $12 region, the broker said he was not overly concerned. "The funds could respond, but they have managed to stay mostly short through market strength in February and early March. The biggest one-week cover was 20,000 positions, but they slammed them in the very next week. I think if we break through the $9 level, a lot of selling pressure will come in here, whether it is from the funds or someone else. I really believe there will be an acceleration."

The broker noted that the near term and intermediate term are "two very different stories" due to the time of year. "We are sort of in the shoulder area, so there is not a whole lot out there in the way of weather reports to hang your hat on," he said. "One is going to say warmer, the other is going to say colder, and it really isn't going to matter. While I may be bearish now, in the medium term there is a very strong structural bullish story for natural gas. News reports over the last week confirm that as LNG [liquefied natural gas] cargoes are being bid away and countries like Japan are buying 10-year LNG supplies at very high prices, the prices in the United States are going to have to go up in order to attract those extra LNG cargoes, which we have become dependent on. While the U.S. only sees a small number of cargoes, they are the balancing numbers for domestic supply, so the market will adjust to get them here. Come summer, when we get some heat and start talking about hurricanes, I think we could easily run right back up to double-digit prices."

If the wide swings in natural gas futures prices last week have you confused, a focus on seasonal patterns may clear the air. Walter Zimmerman of United Energy argues that natural gas is now in the ending stages of a pre-season rally. "Wednesday, natural gas was approaching the end of a seasonal advance. [It] did not reach our desired upside target, but the ensuing retreat [Thursday] bolsters the case for further downside into next week," he said.

Bulls aren't giving up. "For now, we are maintaining a bullish trading bias in anticipation of an eventual up-move to the $10.360 area basis May futures," said Jim Ritterbusch of Ritterbusch and Associates. Although Thursday's plunge of 41.5 cents in May futures to $9.417 was more than his firm anticipated, "we still view supply side fundamentals as sufficiently bullish to limit downside price moves going forward through the spring period," he said in a Friday morning note to clients. Ritterbusch looks for a repeat attempt of the May contract to reach the mid-March highs.

Friday's trading may prove critical to the bullish case. "If the bulls are going to argue this retreat is part of a bull market correction and new highs are still a possibility, [May natural gas] needs to hold above the 0.618 retracement at $9.250," said Zimmerman. Below $9.250 Zimmerman cites additional support at $9.

Some bulls may not wait for $9.25 to bail out of this market. "We're long May natural gas from approximately $9.400 -- stop $9.330," said Phil Flynn of Alaron.

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