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Futures Track Higher on Market 'Unknowns'

Natural gas futures on Tuesday strung together their fourth consecutive day of gains as the April contract rose 5.3 cents to close at $4.347. The gains continued despite dominant bearish fundamentals, but one trader was quick to note that the "futures market is not called the current market."

Over the last four sessions, front-month futures have added 66.3 cents. The recent strength despite weak demand has had some market participants scratching their heads while others think the rally was well anticipated.

"Sure, all of the direct fundamentals surrounding this market -- such as the economy, supply and demand -- are currently bearish, but the key is those are all known quantities and have already been factored into the market," said a Washington, DC-based broker. "The question is what is out there that we don't already know about. The unknowns I think have more potential to be bullish. We've got summer heat and hurricanes on the way, but nobody knows how those will play out. Also, if we keep taking down these rigs and any sort of demand comes back in, can we meet it? The industry has been shutting down vertical rigs and a fair amount of horizontal shale rigs as well. The market is always trying to look at what the next problem it is going to face is. We know the economic slump, we know the bank bailout is going nowhere fast and we know global demand is down, but natural gas at these prices is attractive."

The broker also noted that the size of the rally has been exaggerated. "Simply from a technical point of view, the rally in natural gas has been decent. It has not roared off of the lows like crude has, but it is the best it has looked in a while."

Looking down the road, the broker said the bulls likely have a friend in President Obama. "Obama has shown that he is adept at working on a number of fronts all at once, but the banking system has taken most of his attention recently. I would suspect once we start getting the banking system stabilized, the next thing Obama will look at is energy. From a green point of view, natural gas is the answer...especially at sub-$5. At these prices, T. Boone Pickens' plan to use more natural gas starts to make a little bit of sense."

Talking prices, the broker said the market is approaching some pretty good tests. "The $4.400 to $4.500 level should offer some pretty good resistance," he said. "We spent some time in that area through the beginning part of February, so the market is no stranger to that price level. Beyond that, resistance could come in around $4.850 to $4.900. I think we could get up there because we normally have a spring rally in natural gas. Add to that the laying down of rigs, and it makes the idea of a pop higher even less remote."

For natural gas traders thinking that strength in the stock market may carry prices higher, there is a word of caution. Mark Hulbert of MarketWatch noted that "bear market rallies are almost by their very nature powerful and impressive. If we were to endow the bear market with intent, we would say that the very purpose of a rally is to draw as many gullible investors back into the market before the next leg down commences."

Jim Ritterbusch of Ritterbusch and Associates points out that recovery of the industrial sector will lag the overall economy and any increased use of natural gas will require improvement in the housing sector. "With these considerations in mind, we are maintaining an opinion that current nearby futures prices in the $4.300 area will be difficult to sustain into Friday's April contract expiration when the transition from paper to physical supply forces a closer inspection of underlying supply-usage balances. In short, we are still looking for a move back down toward the $4 area over the near-term period."

Future production declines continue to become more likely. In its most recent report Baker Hughes reported that the number of rigs drilling for natural gas dropped for the week ending March 20. The rig count was down 27 to 857 and lower by 576 relative to a year ago.

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