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Futures Rally on Cries That Spring Has Not Yet Sprung

Those who viewed the lackluster morning trade and forecasted a quiet lead into the weekend for natural gas futures were sorely mistaken as a fierce round of short-covering was sparked just before 2 p.m. EDT. April natural gas futures reached a high of $4.425 before closing out the regular session at $4.403, up 15.9 cents from Thursday's close.

"Friday's afternoon jump was a little odd, but kind of makes sense when you look at things in terms of current fundamentals," said Steve Blair, a broker with Rafferty Technical Research in New York. "Right now in New York it is approximately 45 degrees and we had two days this week that it snowed. Reports of spring's arrival appear to be a bit premature. The near-term forecast is for below-normal temperatures for much of the eastern portion of the country. As recently as a week ago, people were expecting an overall storage injection in the storage report we got Thursday, but that changed real quick once the weather changed. I think this rapid change is responsible for goosing this market."

Even with the surprising jump in values, Blair warned that the bulls are not likely to run away with anything here in the near term. "Major resistance still resides at $4.500. Even with Friday's run-up, we're still maintaining the $3.750 to $4.500 range that we've been back and forth in for months now. Sure, Friday's spike was bullish, but we didn't break into any new territory, and I think that is what is important here."

Commenting on the bullish natural gas hype surrounding both the unstable situation in Libya and the three-headed tragedy in Japan, Blair said he wasn't buying in. "When the unrest in Libya began and talks of Japan needing a large influx of natural gas to rebuild and keep the lights on in the wake of an earthquake, tsunami and nuclear power failure, people were saying that gas prices were going to jump," Blair said. "That may be true on global gas prices, but what does that have to do with U.S. domestic natural gas prices? We don't have the capability of exporting any meaningful level of LNG to Japan. The argument doesn't hold water. Now, if our exporting capability grows significantly over the next few years, then the story changes."

Natural gas futures bulls received some support for their case Friday as fresh data revealed that drilling activity in the shale plays backed off for the week ending March 25. According to NGI's Shale Daily Unconventional Rig Count (http://shaledaily.com), which utilizes county-level rig data provided by Schlumberger's Smith Bits to more accurately target drilling levels in individual shale plays, rigs operating in North American shale and unconventional plays declined by 11 for the week to 972. The largest drop-off was seen in the Eagle Ford Shale in South Texas, which declined by five rigs to 158. The next largest drop was recorded by the Haynesville/Bossier play in northwest Louisiana and East Texas, which dropped by four rigs to 139.

Analysts see a near-term tug-of-war between supply bears pointing to Thursday's on-target 6 Bcf inventory draw and weather bulls citing near-term cooler temperatures across eastern points. "[Thursday's] post-EIA selloff following a seemingly neutral storage withdrawal of 6 Bcf reinforced our opinion of a well supplied market that remains appealing to the bearish inclinations of the large speculative community. However, an early spring cold spell could preclude much downside price follow-through until next week," said Jim Ritterbusch of Ritterbusch and Associates.

Ritterbusch contends that "much of the strong 50-to 60-cent price advance that has developed during the past three weeks was driven by not only a major temperature cooldown but also by the sharp contrast against last year's warming trends that were developing at about this time. Temperatures last March accommodated an unusually early supply trough with the March 11 data, resulting in a counterseasonal storage injection of almost 50 Bcf during the final three weeks of March 2010."

Students of the economy were not surprised with the 8:30 a.m. EDT release of Gross Domestic Product data from the Commerce Department. Analysts had been expecting a growth rate of 3.1% for the fourth quarter of 2010, and the actual figure came in at 3.1%. Growth in the third quarter was 2.6%. GDP is the broadest measure of economic activity and the 3.1% growth rate shows the economy is still growing, albeit at a pace insufficient to make serious inroads to high unemployment and for that matter tepid industrial demand for natural gas.

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