April natural gas futures worked lower Tuesday as traders continued to focus on expected production levels rather than near-term weather or storage. Near-term weather forecasts signal the end of what has been a very cold heating season, and short-term analysts have a $3.50 target in their sights. At the close April futures were down 6.3 cents to $3.864 and May lost 6.0 cents to $3.924. April crude oil declined 42 cents to $105.02/bbl.

"When prices got up to $4.70 about a month ago we were fading [selling] the summer and the balance of the year for our clients, but some of them won't talk to you unless prices get above $5," said an Oklahoma City risk manager.

"The big challenge for natural gas is that during the December-January period of a year ago the whole [price] curve collapsed because of the shale plays and the concern was that there wouldn't be a turnaround for a number of years. I think we could have a dip this spring down to $3.50 to $3.25, but every time it gets to $4 it just dies out."

"I will say that I think we could have a pretty good bounce in the spring. It seems like there is always a seasonal rise and I wouldn't want to be short natural gas past April. You have to look at the back end of the curve, and maybe that's where traders should be focusing their attention," the Oklahoma City risk manager said.

He noted that "the 2013 strip is at $5.13 and there is a lot of risk to put on an extended trade, but you might want to look at buying a $4.50 put and selling a $5.50 call option [for producers and physical market longs]."

"Everyone drills horizontal wells now and people say, 'I can drill those all day long at $5,' but what kind of return are you getting? Is it worth it for the kind of risk you face in this industry?"

Early estimates of this week's inventory report are coming in around an 80 Bcf withdrawal. For the week ended March 4, IAF Advisors expects a 79 Bcf pull and Citi Futures Perspective predicts a withdrawal of 84 Bcf. Last year 112 Bcf was pulled and the five-year average stands at 104 Bcf.

Analysts see fund and managed account selling as a difficult hurdle for any sustained price advance. "[W]ith funds selling as aggressively as they have been recently, it is difficult to construct a scenario in which prices are likely to rise," said Peter Beutel, president of Cameron Hanover. "Even if we get bullish temperature and storage outlooks this week, the technical damage done to this market just seems so extensive that it becomes increasingly difficult to see our way clear to higher prices again."

"The bottom line is that funds are still predicating selling on ample shale gas supplies and on the lack of any new demand creation. This has struck us as unusual given how much new demand there has been on the oil side, at least as far as the economic outlook numbers have been suggesting. There does not seem to be any allowance for additional demand, despite predictions for higher employment, manufacturing and factory activity," he said.

Technical analysts see proof of the market's next move squarely on the shoulders of the bulls. Monday's 11.8-cent rally was moderately helpful to the case for higher prices, but much work remains to be done. "Once again we must ask: relief rally or true bottoming action?" said Brian LaRose, analyst with United-ICAP. "To even suggest the latter both $4.021 (0.7862 of $4.100-3.731) and $4.135 (0.500 of $4.496-3.775) must be decisively exceeded from here. Accomplish this and the case for further downside will be in serious jeopardy. Fail to clear these two hurdles and we would anticipate a drop to $3.568-3.408 before any recovery."

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