Futures rose but traders saw the advance as devoid of any directional factors and noted active spread trading. Trading of outright futures and options was light. At the close April had added 6.6 cents to $3.930 and May futures were up 6.2 cents to $3.986. April crude oil fell 64 cents to $104.38/bbl.

"I think traders are looking for the $4.00 to $4.04 area to either initiate new short positions or add to existing ones," said Eric Bentley, senior trader at Viking Energy LLC of New York.

"Today I think the market rose in large part on the buying of the April contract and selling of October. We have seen a pretty good trading range of 29 to 31 cents [April under]. Outright activity has been pretty light, but traders are looking for the April-October spread to widen out no farther than 33 cents. Today has been mostly a spread game."

Bentley noted that some traders had to scramble to avoid losses. "You are right in the midst of some small Goldman Sachs index rolls [selling the April contract and buying May], and last Friday some guys on the trade side were trying to front the roll [April-May settled at 7.8 cents Friday], but today they are getting hammered a bit and that is adding to the strength in April. The Goldman roll turned out to be a little bit less aggressive than traders thought and they had loaded up on the one side. That trade is not working for them." April-May settled at 5.6 cents.

Typically spread trades by institutional traders are done in large volumes as exchange margins are less and the perceived risk is lower, but spread trades can often generate gains and losses with the same ferocity as outright long or short positions. "Today it was a lot of the whales in action, and a lot of smaller fish got caught up as the market went against them," Bentley said.

"If you look at price action, it is sort of light and kind of disappointing that natural gas has itself in something of a rut. A lot of options guys are running around looking for an increase in volatility, and they are not seeing it. It's not very exciting here before the [inventory] report."

Trading volatility will often surge on the release of Thursday's inventory data from the Energy Information Administration (EIA), and expectations for the 10:30 a.m. EST release of the data show traders anticipate a withdrawal far lower than last year and historical averages. Last year 112 Bcf was withdrawn and the five-year average stands at 107 Bcf. A Reuters poll of 27 traders and analysts revealed an average 77 Bcf pull with a range of 62 Bcf to 87 Bcf. IAF Advisors' Kyle Cooper anticipates a draw of 79 Bcf and industry consultant Bentek Energy utilizing its North American flow model predicts a decline of 81 Bcf. Bentek calculated a draw in the East Region of 66 Bcf, a draw of 18 Bcf in the West Region and a build of 3 Bcf in the Producing Region.

Bentek noted in its report that the forecast called for another injection in the Producing Region for the week ended March 4, and this would put inventories back above the five-year record high. "Storage inventories hit a new all-time record high last November but cold weather forced large withdrawals in December and January, making inventories fall below such high levels on the week ended Feb. 11. Only three weeks later and after the earliest start of the injection season for the Producing Region, inventories again are setting a new five-year high. These high inventory levels are mostly attributable to production growth and storage capacity additions."

Prior to Wednesday's advance analysts saw a case for improved prices. Tim Evans, an analyst at Citi Futures Perspective, said, "While neither Thursday's storage report nor the forward temperature outlook looks supportive, there is still some potential for prices to work back into the $4.25 to $4.50 area in our view as the market's February decline left prices at a discount to either the $4.40 valuation of a year ago or the five-year average of $6.38/MMBtu with less inventory on hand."

Evans forecasts a withdrawal in Thursday's report of 84 Bcf, 20 Bcf below the five-year average.

Evans suggests holding long positions in April futures at $3.93 with a protective stop at $3.69. Should April move over $4.00, "we would bump the sell stop to $3.79," he said in a Tuesday afternoon note to clients. Evans' recommendations are his and not those of the firm.

The bullish case was dealt something of a setback Tuesday when the EIA released its March Short Term Energy Outlook (see Daily GPI, March 9). The EIA noted that the Henry Hub spot price had fallen more than 40 cents for the month to $4.09 for February. In its calculations it also lowered its forecast average Henry Hub price for 2011 to $4.10 from $4.39 a month earlier. Key assumptions in the forecast for 2011 include a decline in residential consumption of 1.2% and commercial demand seen as being 2.7% lower. Production is assumed to grow by 1.0 Bcf/d as onshore production gains are offset by Gulf of Mexico declines.

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