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'Direction Question' Alive as Futures Stumble Into Weekend

Natural gas futures made another run at breaking above $4 on Friday morning but once again were rebuffed, this time failing to even touch the psychological resistance level. Ultimately, traders were comfortable heading into the weekend well within the recent trading range as the July contract closed Friday's regular session at $3.857, down 7.6 cents from Thursday's finish and only 1.1 cents lower than the previous week's close.

After running up 22.5 cents on Thursday, the July contract backed off in overnight trading and began Friday's regular session by quickly notching the day's low of $3.741. However, futures rebounded from there to record a high of $3.973 just after 11:30 a.m. EDT before backing off once again to close.

Some traders on Friday were still perplexed as to why futures rallied so hard Thursday following the 106 Bcf storage injection report for the week ending June 5. "My view on this market really has not changed over the past few weeks. The direction question is still unanswered. I still feel that this market is not being driven by supply/demand fundamentals," said Steve Blair, a broker with Rafferty Technical Research in New York. "We just added another chunk to the year-on-year storage overhang and are closing in on having 600 Bcf more in the ground than we did a year ago, so when I see a day of trading like Thursday, I just shake my head. We got a storage report that was basically 3-4 Bcf below expectations and the market knee-jerks 10 cents higher. Did anyone take into account the fact that the injection added 22 Bcf to the overhang over last year's level?

"This is not currently a supply/demand-driven market. It is apparently more fund-induced. That said, what is really scary is the fact that natural gas out of all of the energy contracts is staying the truest to its fundamentals in that its value is not going straight up like crude, gasoline and heating oil."

Blair said support and resistance zones are pretty cut and dry. "Minor support comes in around $3.690 with major support coming in around $3.510. On the upside, resistance lies just above $4."

Some saw Thursday's 22.5-cent advance by the July futures to settle at $3.933 as prescient. "Natural gas futures finally grabbed onto something [Thursday], and they used it to move in the direction they have been leaning towards for a while now," said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm.

Beutel contended that prices are headed higher. "After spending most of the last week trading between $3.650 and $3.880, gas prices finally broke to the upside [Thursday] in response to this week's EIA [Energy Information Administration] underground storage figures. One could argue that the backdrop had been painted by higher oil and commodities prices before the report was out," he said.

Others couldn't disagree more. Shortly after the report's 10:30 a.m. EDT release and subsequent knee-jerk higher of futures values, some traders remarked that it looked like nervous shorts exiting the market.

"The number was pretty much in line, and there was no big deal on that," said John Woods, senior trader with Integrity Energy in New York. "Without a doubt this is a short-term selling opportunity. You get this market up around $4.100 and you will see some traders come in and sell this market. If the market gets up to $4.300, you will scare some of the shorts out of the market, but some of the longer-term traders don't give a hoot and if it goes higher, that would just be a better place to sell. All the fundamentals say lower. There's no weather [anywhere] and in New York it's 60 degrees."

Bulls nonetheless are ready. Phil Flynn of Alaron says, "Buy July natural gas at $3.300, stop $2.900."

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