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$4 Seen as Key; May Drops in a Day Dominated by Oil Trading

May natural gas futures drifted lower Friday as traders noted little in the way of buying as prices completed the sixth day in a row in the loss column and traders shifted their interest to the petroleum complex. At the end of the day May had fallen 1.6 cents to $4.041 and June shed 1.9 cents to $4.107. May crude oil rocketed higher by $2.49 to $112.79/bbl.

The seemingly unrelenting fall of gas futures has stirred little interest among buyers. Short-term traders see the market as something of a trading vehicle with market gains such as the run to $4.44 seen on March 31 as a sell point with market direction going forward dependent on May futures holding above $4. "It looks like there are now shorts in the market looking to push it under $4. They are more cautious now because of the way crude oil is going," said a New York floor trader. "Not that there is a direct correlation, but traders are cautiously pressuring the market lower. The play is to work the market from the short side."

The trader added that concerns of summer heating load and the Atlantic Basin hurricane outlook for the moment were off the table and traders were looking at short-term chart points to plot their next move. "I think $4 is a pivot area, and if traders are able to hold the market below $4 [next week, for example], they will become more aggressive sellers. $4 would become the next resistance," he said.

Others see trading in natural gas dominated by crude and liquids trading. "There is a natural gas futures market open today, but gasoline is up over 8 cents, heating oil 11 cents, and crude is higher by $2.49," said a Washington, DC, broker.

He did note that $4 was a natural zone of technical support for natural gas and "$3.70 below that. The last advance [to $4.44 last week] was a textbook example of short-covering. The gains in price all took place with reductions in open interest. Shorts covered but nobody really got long and that is part of the problem. Production is strong, there is some concern that there will be the loss of a major consumer at midnight Friday [the federal government], and the impact of high crude and liquids prices on the health of the economy is in question. Natural gas was overshadowed by what was going on in the petroleum complex."

From an Elliott Wave and retracement perspective, the broker sees the market at a critical point. "If we don't get a rally ASAP, you can make a case for the start of another five-wave pattern down. Any interpretation you make, $4 has to hold for the upmove from last October to remain in place."

With the heating season now in the rearview mirror, analysts will eventually be turning their attention to the outlook for the summer heating season and Atlantic Basin storm forecasts.

The National Weather Service in its forecast for June, July and August shows a wide area of the West, southern Plains and Gulf Coast at above-normal temperature readings. South and west of a sinuous line extending from western Montana to southwest Oklahoma to Georgia is forecast to experience higher-than-normal temperatures. A modest pocket of below-normal temperatures is centered around Indianapolis, IN.

Tropical forecasters are calling for an active hurricane season, though slightly less than earlier estimates. On Wednesday the Colorado State University forecast team predicted an above-average 2011 Atlantic Basin hurricane season featuring a 72% chance that at least one major hurricane will make landfall on the U.S. coastline. The analysts slightly reduced their early December prediction but still called for an active season based on current La Nina conditions that are expected to transition to near-neutral conditions during the heart of the hurricane season (see Daily GPI, April 7).

Top analysts see the market headed lower, but not that much lower. "We will look for the EIA's updated monthly Short Term Outlook that will be released next Tuesday to indicate an upward revision in the agency's production expectations across this year," said Jim Ritterbusch of Ritterbusch and Associates. He added that the market "has proven weaker than we anticipated by dropping to below the $4.20 level this week. From here we will expect a brief violation of round number support at the $4 area with prices consolidating early [this] week. We have difficulty in constructing a scenario that would carry prices to below the $4.00 mark on a sustained basis. Consequently, we will look to probe the long side of the market early [this] week in anticipation of a renewed price upswing of some 20-30 cents."

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