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Bulls Reined in as Futures Drop 11 Cents

After seeing June futures gain 35.2 cents during the previous two regular trading sessions, bullish natural gas traders were forced to cool their heels on Tuesday as the contract ended up dropping 11 cents to close at $3.615.

Those who believed this run-up was no different from the previous false rallies during the larger downtrend were vindicated Tuesday as the prompt-month contract opened at the day's high of $3.697 and descended from there (see Daily GPI, May 5). Just after noon EDT June futures recorded a $3.570 low before inching higher to close.

"Unless the contract gets above $3.850, the bulls really don't have any firm ground on which to stand," said a Washington, DC-based broker. "Even though analysts are saying that commercial buying is holding up, a lot of my clients are indicating that they have done a lot of their buying already, so it is not like they have been waiting for a long time to unleash the fury. If it did happen to trade north of $3.850, then the door is open to $4.350, which would be an even stiffer test to get through."

The broker noted that the million-dollar question is still about when supplies will begin to feel the impact of the rapid decrease in drilling. After peaking at 1,606 rigs actively searching for natural gas within the United States in early September 2008, 865 of them had stopped their quest as of May 1, 2009, according to Baker Hughes.

"A recent Morgan Stanley report talks about how the bite on production could start to occur during the back half of May into early June," the broker said. "Even though we have been reducing rigs since October-November, they had a line of reasoning that we'll start to see the results of that on storage in the form of lighter injections. Maybe the market is looking to get prepared for that, but it is unclear. The funds have not been bailing on their short positions yet.

"If we punched through $4.350 on big volume, then we definitely have something going. Everyone would be looking to get long because they think that bite on production will really mean something. Until we see a move like that, I'm still from Missouri -- the Show-Me state."

Some traders were not willing to make much of a connection between Monday's rally and any improvement in fundamentals for natural gas. Jim Ritterbusch of Ritterbusch and Associates called Monday's gain "technically inspired" and said it "has all of the markings of a bear market correction that could easily be followed by fresh contract lows. Although the market has managed to garner some strength from some better economic input of late, we remain reluctant to draw a close association between these better-than-expected manufacturing figures and any pickup in industrial demand for natural gas."

Ritterbusch counseled accounts to hold on to short June positions established late last week between $3.500 to $3.600 and is "leaving open the possibility of an ultimate price decline toward the $3.150 area."

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