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Traders Mull Resilient Market, Yet May Weakens

May futures were slightly lower on the day Friday, but traders saw fresh buying entering the market. The buying came late in the session and sparked an 8-cent rally to pick the market off session lows. At the close May was lower by 2.7 cents to $4.362 and June eased 2.1 cents to $4.437. May crude oil continued higher, adding a hefty $1.22 to $107.94/bbl.

"We are seeing new money entering the market. It's index-related buying and length that appears to want to add commodities to their portfolios," said a New York floor trader. He added that the funds came in toward the end of the day and were less concerned about the settlement price than making sure the buys were made on the first day of the new quarter.

"In my view this market is about 15 to 20 cents overvalued, but [for any bearish case to prevail] we have to get this cold weather off the calendar. However, some investment tools such as commodity index funds or the like just want to own commodities as a whole. We had a pretty good comeback from the low," he said.

"Fundamentally, most people think this is a rally to sell, and today's buying at the end may just be an aberration. Today I was doing some scale-up selling in the May outright, but if the market had gone to$4.45 to $4.50, I don't think it would have made much progress. There were some good offers in the May outright."

The trader added that the market was not all just buy and follow the trend. "There are some money managers out there who have the ability to follow their opinions and are ready to sell as opposed to the funds who take the long side in more of a 'buy and hold' approach. [This] week should be fun," he said.

The theme of the market rallying off session lows was on display Thursday as well, and some see that resilience was reinforcing an overall bullish dynamic. On Thursday Peter Beutel of Cameron Hanover, a Connecticut-based energy consulting firm, said, "Traders looked beyond this week's [inventory] numbers, expecting the cold weather seen recently in the North to give us a drawdown in stocks next week. This was an unusual -- and unusually bullish -- reaction in this market. Up until this report, the bears have consistently had their way with the weekly figures. When they have been bearish, even when the outlook was for a better draw the following week, the market has typically declined. And when we have had large draws during moderate weeks, the market has more often than not looked ahead to the anticipated disappointment coming. This time the shoe was on a bullish foot (hoof?)."

Beutel is fully aware that underground storage is behind year-ago levels but ahead of the five-year average by 68 Bcf. "In a number of recent reports that statistic could have given us lower prices all by itself. The major undercurrent of thinking in this market has changed course and is becoming more entrenched in its new course every day. President Obama's energy plans have dovetailed with Japan's nuclear struggles to give a fresh lease on life to natural gas in the United States."

Rather than seeing a market that made a healthy rebound off session lows Thursday, others suggest that the 12 Bcf build contained in the Energy Information Administration's report indicated a somewhat weaker demand picture than previously thought. "There had been some talk prior to the report that because the colder temperatures arrived late in the week, there could be a build rather than the draw in our model, which is based just on past storage flows and the population-weighted degree day accumulations for the period," said Tim Evans, an analyst with Citi Futures Perspective in New York.

He added that the "build of 12 Bcf happened to match the date-adjusted injection in the same period of 2010, maintaining a year-on-year storage deficit that is also 12 Bcf. The result was clearly bearish. When compared with the five-year average net withdrawal of 22 Bcf, the build increased the five-year average surplus to 68 Bcf.

"Looking ahead, we have assumed that the build for last week implies at least a somewhat weaker supply-demand balance than had been the case and not just a timing issue. As a result, our forecast net withdrawal for next week's report has been reduced by 10 Bcf to 58 Bcf. Beyond that point we're shifting back to our basic storage model."

Technical analysts see the market headed higher if signs of a market top aren't demonstrated soon. "The question here: did natgas simply run out of time or did this rebound [Thursday] just run out of steam?" said Brian LaRose of United-ICAP. "So far the rebound from Tuesday's $4.195 low counts like an ABC correction. If this count is right, natgas should be able to turn sharply lower from the $4.399-4.419-4.440 zone. Fail to carve out an immediate top Friday and a test of the pivotal $4.634-4.747 zone would be expected next," he said in a post-Thursday close note to clients.

Observers of the economy received a somewhat better-than-expected report on March employment. The Labor Department said non-farm payrolls increased by 216,000, ahead of the 200,000 the market was expecting and an improvement over February's addition of an upwardly revised 194,000. The employment rate decreased from 8.9% to 8.8%. Analysts observed that hiring is beginning to build steam as businesses try to keep up with strong orders and backlogs, but wages are weak and inflation is strong. That combination has undermined consumer confidence in future income. The department added that April employment data is likely to reveal the first effects of the Japan disaster and that could cloud the U.S. economic picture.

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