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Prices in a 'No-Man's Land'; Weakness Mulled as April Eases

April natural gas futures retreated Monday, but only after registering another eight-week high and keeping the bullish case intact. New high or not, short-term traders are suspicious and sense that a rise above $4.50 will be met with stiff selling. At the end of the day April futures had fallen 2.9 cents to $4.374 and May shed 4.2 cents to $4.448. May crude oil dropped $1.42 to $103.98/bbl.

"I think the large traders are looking to support the market before they turn around and sell it again," said a New York floor trader. "I think around the $4.50 area is where traders will try to push it before they sell."

He added that the market's current range was something of a "no-man's land", and the "$4.26 to $4.29 area up to $4.43 to $4.447 is where the market can just waffle back and forth. If prices break out of that range, then I look for traders to take a shot selling it at $4.51 to $4.53. Unless some news comes out, I have a feeling the market will be sold against that area. The higher prices get, the better traders feel about selling."

Tim Evans of Citi Futures Perspective called the natural gas market "divided over how much to make of the cooler-than-normal temperatures that have helped lift the market back into the $4.25 to $4.50 range we had been looking for. We see the upside potential as more balanced with downside risks from this level, with a break in the temperatures and the eventual end of the storage withdrawal season possibly allowing a swing back toward $4.00 as an offset to the potential for renewed gains in our view. The storage outlook is constructive with the potential for a swing from the 34 Bcf year-on-five- year average surplus of March 18 back to a 45 Bcf year-on-five-year deficit by April 8. That said we would still characterize storage as 'near average' and the real question for the market is what general price level fits with the average, rather than which way the jet stream will shift next."

Data from the Commodity Futures Trading Commission showed another rush to exit short positions and increases in long holdings by directional traders (managed money) in its latest Commitments of Traders Report. For the five trading days ended March 22, long futures and options (2,500 MMBtu per contract) at IntercontinentalExchange rose 27,199 to 279,251 and shorts tumbled by 36,457 to 82,165. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by 1,234 to 138,127 but short positions dropped 37,939 to 240,430. When adjusted for contract size, long futures and options contracts at both exchanges rose by 8,034 but shorts fell by 47,053. For the five trading days ended March 22, April futures jumped 31.3 cents to $4.254.

Mike DeVooght of DEVO Capital, a Colorado-based trading and risk management firm, advised trading clients to sell April $4.05 put options and said that as prices advanced he was able to book profits when option premium fell to 1 cent. For producers and those with exposure to lower prices, he advises holding on to an April-October strip consisting of purchases of the $4.50 put against sales of the $5.50 calls at even money for 10% of physical exposure. "We will add to this position if the balance of the summer strip hits $4.75-4.85," he said in a note to clients. End-users are counseled to stand aside.

Overall, DeVooght sees market fundamentals as unsupportive of higher natural gas prices "but it is our feeling that current price levels have already discounted a lot of bearish news. Exaggerating the price weakness over the past year has been the lack of urgency by end-users to do any forward purchases. Until something changes current perceptions, natural gas rallies will be fleeting. What eventually will be the catalyst to create buyer urgency is anyone's guess. It is still too early to tell if recent events will be enough to break the protracted bear market in the gas market."

From a trading perspective, DeVooght senses that "the gas market is establishing a base and will most likely continue to trade in the high $3 to high $4 range in the weeks and months to come. We will continue to sell put premium when we approach the $4 level and sell calls and contracts when we approach the $5 level."

Tom Saal of Hencorp Futures in Miami reminds clients that "Only participating traders can influence the price of natural gas futures contracts. One group is commercial hedgers, made up of buyers and sellers of natural gas MMBtus. The other group is professional speculators, made up of a variety of traders whose main goal is the profit from a vertical price move in natural gas futures contract prices."

In his work with Market Profile, Saal said he expects April futures to test Friday's value area of $4.307 to $4.240. Saal is not specific in his timing, but "typically value areas are filled the next day," he said.

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