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Further Downside Debated; May Eases

May natural gas futures drifted lower in uninspired trading Tuesday as traders debated the likelihood of another move lower. At the close May futures had fallen 1 cent to $4.098 and June was down 0.8 cent to $4.168. May crude oil tumbled $3.67 to $106.25/bbl.

"It looks like the market is poised to hold $4. With all the other markets getting hit, natural gas is holding in there, but I think when the [inventory] number comes out Thursday we'll be below $4. I'm thinking $3.90 to $3.95 when the number comes out and we'll see where we go from there," said a New York floor trader.

He said the fall was predicated on a neutral to bearish inventory figure Thursday. Kyle Cooper of IAF Advisors in Houston forecasts a 41 Bcf gain, but last year 79 Bcf was injected and the five-year average is a 28 Bcf build.

The floor trader added that the market felt a little "heavy" to him, and "the market has been trading for the last two weeks in a 25-cent range, but it looks like somebody is protecting some length. Every time the market comes off, you see a good influx of buying. Prices then back bounce a little bit, but if we trade below $4, I think the longs will give up and we'll trade down another 20 cents."

With other markets getting pounded, natural gas seemed like it was afloat on a sea of tranquility. "Natural gas is bottoming. It has nowhere to go," said a California risk manager. He said the crude oil market was a "mess" with too much of a geopolitical component in its valuation.

"Natural gas is in a more normal phase. If we get some heat, then we are off to the races, but no one seems very concerned. Hedging natural gas is very quiet," he said.

Somewhat contrary to the New York floor trader, the California risk manager said, "I don't see natural gas futures moving much lower unless someone gets on a campaign at this level. I don't know how many guys can overshort the market, and you have to remember [new] financial regulations are going to stop some of these extra shorts in the market place. That's what you have to read out of this."

Cynthia Kase, president of Kase and Co., said technical indicators can be great tools for gas buyers -- both physical and financial. "The technicals can tell you what the market knows and is 'thinking' about itself. As long as what you are buying -- even if it is physical gas -- has a reasonable correlation with Henry Hub, it works," she wrote in a research note Monday morning. "Technical analysis is objective and unemotional. That is why it is important to incorporate technical analysis into gas-buying decisions."

She added that five "simple technicals" have told a "straightforward story" about May natural gas. "The geometric patterns, wave projections, retracements, candlestick patterns and momentum all indicate the move down should continue to at least $3.89," Kase wrote. "However, the daily morning star setup and failure to close below the lower support threshold of the flag means that first a correction is likely. The correction will likely hold $4.22 and no higher than $4.48."

Kase will be holding a pre-conference session at GasMart 2011 in Chicago on May 10. To register for GasMart, or to read more of Kase's views on natural gas trading, visit http://gasmart.com/gasmart2011/precon.html.

Some analysts see market support emerging in the form of reduced drilling rather than timid short traders. "The Baker Hughes natural gas drilling rig count at the start of April was 6.1% lower than a year ago and 9.4% below the August 2010 peak, pointing first to more moderate energy supply growth over the first half of 2011 and then to the possibility of reduced supply by the end of the year," said Tim Evans with Citi Futures Perspective in New York. "We see this trend toward lower drilling and production rates as supporting a recovery in prices to $4.50 over a six-12 month time frame."

In the near term others are also viewing the market as holding its own, if not positioning itself for additional gains.

"We still feel that a price bounce off of the $4.00 mark is capable of extending toward the $4.25-4.30 area before a reversal back to the downside develops," said Jim Ritterbusch of Ritterbusch and Associates in a morning note to clients. "Such price action will likely have much more to do with positioning on the part of the large speculators than with any fundamental headlines. While the short-term six- to 10-day weather view appears supportive with some below-normal temps expected across the upper Midcontinent, we don't look for these below-normal patterns to translate to a major shift in HDDs [heating degree days]. As we look for some Tuesday consolidation within the price range of the past two sessions, we will also be looking for a volatility spike on Thursday with another release of the EIA storage stats."

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