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Bears Control April Expiry, But What About May?

Still reeling from Thursday's report of a surprise 3 Bcf injection into natural gas storage for the week ended March 20, the expiring April gas futures contract plunged lower Friday as market participants were forced to decide whether they wanted to "make or take" delivery.

April futures made it two straight days of 30 cents-plus drops Friday as it went off of the board at $3.631, down 31.6 cents from Thursday's close and 59.6 cents lower than the previous week's finish. The May contract closed the regular session 29.7 cents lower at $3.737.

In addition to dropping 69.8 cents over the last two trading days, the April contract also notched a new low for the down move when it touched $3.600 just prior to expiration. Front-month futures haven't traded that low since late September 2002.

"The name of the game in natural gas futures is volatility. What we are seeing is symptomatic of the migration to electronic trading," said Tom Saal, a broker with Hencorp Becstone Futures LC in Miami. "The liquidity at certain periods of time during the day is much different than when most of the business was being conducted on the floor."

Looking at the recent back-and-forth in prices, Saal said it reads like a tale of two storage reports. "We were up last week largely on a slightly bullish storage report and now we have reversed course on a bearish storage report. We now find ourselves kind of where we were before the first report."

Addressing Friday's drastic drop in values, the broker said anything can happen on a contract's expiration day. "It is an expiring contract. It comes down to who wants to make or take delivery in a market that has extremely weak fundamentals," he said. "It is nothing more or less than that."

Saal said he expects the May contract will pick up right where the April contract left off. "It is probably going to meander sideways to maybe lower until we get some kind of real tangible change in the fundamentals," he said. "The immediate thing to look at is how the market is going to react to the fact that we are starting the injection season early. That is definitely not bullish. Until we get some bullish factors in here, we'll likely trickle lower here. The next possible support area is at $3.500, so we should see a test of that in the next week."

On Thursday the Energy Information Administration reported that 3 Bcf was injected for the week ended March 20, while a majority of the industry was expecting a withdrawal of around 10 Bcf. As a result, April futures plummeted 38.2 cents Thursday (see Daily GPI, March 27).

The Friday morning release of personal income data for February gave economic bulls some cause for thought. The Commerce Department reported that personal income in February declined 0.2%, slightly more than the 0.1% decline expected by economists and below the revised 0.2% increase reported for January. January's figures, however, were not considered representative of the state of the economy as they reflected government pay raises.

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