April natural gas futures staged a sharp rally Friday as traders noted deeply oversold conditions that were ripe for a short-covering rally. In the words of one trader it was "bound" to happen. At the end of the day April had risen 13.3 cents to $4.005 and May had gained 13.3 cents as well to $4.073. April crude oil tacked on 60 cents to $97.88/bbl.
The sharp rise caught a number of traders holding short positions off guard and they had to move quickly to lighten their exposure prior to the weekend. "Traders were scrambling to cover and hoping and praying for a pullback, not getting it, and finally saying, 'where's the bullet, let me bite it,''' said Viking Energy LLC CEO Eric Bentley.
He noted that short holders' angst was increased as "prices popped over a pretty decent trend line on the charts. The market looked vulnerable to a little bit of upside here, and with [April] prices now over that big psychological $4 number there is a little bit of concern.
"On the flip side cash is not able to get above $4, and so how real is this rally? Natural gas is sometimes a market that doesn't make sense. It can be 58 to 60 degrees outside and still rally 30 cents. It can be 20 degrees below zero and the market will be on its lows. There were some guys who rolled out of March short positions last week into short April and they took some money off the table."
Bentley noted that "one of the big downside levels was $3.85 and with the market unable to sustain any pressure below that number, that may have made some people realize what could come and here we are 15 cents later. It was bound to happen. How many days has the bar chart been negative?"
Others were also mulling the possibility of an oversold market. "While there is some risk that the bearish flow of selling might continue, we see an increased chance that the flow of selling is near exhaustion, with increased potential for a fresh cycle of buying," said Citi Futures Perspective analyst Tim Evans.
Friday's short-covering rally notwithstanding, natural gas bulls may have to rely on cold forecast for the northern tier of the U.S. in longer-term predictions. MDA EarthSat in its Friday morning 11- to 15-day outlook said, "The forecast [called for] ongoing warmth across much of the South and East and persistent cold in the Northwest. The ridge over the Northeast early should slowly weaken and shift into the North Atlantic, allowing this region to moderate after being warmest early.
"Despite some model trends that suggest otherwise, the South is expected to remain warm-dominated -- a signal that correlates well with La Nina. The core of the coldest air should remain focused over the northern Rockies downstream of a potent ridge over the Aleutians."
Some analysts are casting glances at the long side of the market, citing near-term price resilience. "While we must certainly concede to the negative implications of [Thursday's] new lows, we are also aware of the lack of downside price follow-through and the subsequent rebound of almost 13 cents off [Thursday's] lows," said Jim Ritterbusch of Ritterbusch and Associates in a Friday morning report. He admitted that his firm is "maintaining a bullish, albeit cautious, stance for now as we suggest holding any existing long April positions while maintaining stop protection at the $3.85 level on a close-only basis. Although the weather factor is rapidly declining in importance, we can still cite below-normal temperature expectations during the next couple of weeks across the northern tier states or roughly the upper one-third of the nation."
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