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Bulls Need to Prove Their Case, Analyst Says; May Softens

May natural gas was again confined to a narrow 6-cent trading range and eased slightly in options-dominated trading Tuesday.

With 20 minutes left for the floor trading session bulls and bears were locked in hand-to-hand combat as trading in May options expired. The entire day's range was carved out in the last 20 minutes. At the end of trading May futures stood 0.2 cent lower at $4.387 and June had slipped 0.8 cent to $4.444. June crude oil dropped 7 cents to $112.21/bbl.

"Much of the late-session volatility was caused by options expiration," said Eric Bentley, CEO of VKNG Energy LLC in New York.

He said the last-minute surge of the May contract off the session low at $4.333 was due to frustrated buyers completing their trades in the waning minutes of floor trading. "The market was well bid all day and there were a lot of buyers unfulfilled. Finally they had to go to settlement. The market at 2:15 EDT spooked out all the longs when it made a new low for the day and then rallied 5 cents from there. This was strictly on a need for contracts and not based on any fundamental developments.

"A lot of guys were thinking the market would roll up to $4.50, but that never came to fruition, and $4.40 was talked about as a strike that was being defended." Traders who previously sold $4.40 call options would stand to gain as long as May futures didn't settle above $4.40. At times they will sell additional futures contracts to make sure futures prices don't rise above their strike and suddenly become in the money at expiration.

Outside of typical expiration trading gymnastics, analysts see the price discovery discussion centered around near-term weather and appropriate valuations needed to ration supplies at five-year averages.

"The natural gas market is easing modestly on updated temperature forecasts as the week-to-week shift in current temperatures to readings that are less supportive than a week ago," said Tim Evans of Citi Futures Perspective in New York. "Options on May futures expire [Tuesday] and the futures roll off the board [Wednesday], and so there may be some long liquidation under time pressure as an element to the short-term trade. Otherwise, the natural gas market looks quiet, with the price discussion more driven by what the appropriate price match should be for near five-year average storage than any immediate fundamental pressure on values to rise or fall."

Technical analysts see the bulls needing to prove their case. "Since mid-2008 every attempt to push through the 50 level on the daily RSI [Relative Strength Index] (200-bar period) has been repelled," said Brian LaRose, an analyst with United-ICAP. "Once again natgas is knocking on that door. But can the bulls break through? For the bullish case to gain traction from here $4.634-4.747 must still be exceeded. Clear this hurdle and short-covering would have the potential to drive this market substantially higher," he said in a note to clients.

Others see the bulls proving their case with fund short-covering and anomalous weather patterns."Funds had been short for months measured into years. They covered about a month ago but returned to the short side when gas prices stalled just under $4.50/MMBtu," said Peter Beutel of Connecticut-based Cameron Hanover. "Late last week they were covering shorts again, fearful of taking short positions home for the weekend as severe weather alerts popped up from the U.S. Gulf, along the Mississippi, Tennessee and Ohio River valleys up to the Great Lakes."

For the five trading days ended April 19, May futures increased 16.4 cents to $4.262, and government figures confirm the trend of funds covering short positions. In its most recent Commitments of Traders report the Commodity Futures Trading Commission for April 19 showed that managed money at both IntercontinentalExchange (ICE) and the New York Mercantile Exchange increased long futures and options contracts and liquidated short futures and options.

"In a curious twist, there were more rigs actively looking for oil than gas in the United States for the first time since 1995," Beutel also noted. "The fact that oil prices have been in a blistering bull market while gas prices have languished is the primary reason for the change. Natural gas prices seem likely to continue advancing, with peculiar weather patterns gripping the nation."

Others agree. "All you hear about is people drilling for oil, and Oklahoma is a gas state," said an Oklahoma banker.

Unusual weather patterns appear ready to dominate the central U.S. In its morning six-to 10-day forecast MDA EarthSat predicted a large mass of below-normal temperatures behind an arc stretching from northwest Idaho to northern Louisiana to eastern Ohio.

"Changes [to the forecast] were mostly on the smaller side [Tuesday] as the overall pattern still has remained consistent. A fairly potent cold shot will arrive in the Midcontinent at the onset of the period in response to a quick negative spike in the AO [Arctic Oscillation] after an extended period featuring a positive signal," the forecaster said. "This round of cold could push temps toward freezing in Chicago. Trends towards a NAO [North American Oscillation] will also help drive the colder air southward, though the direct impacts from this signal may be better matched with the 11-15 day period. Most of the models are in decent agreement on the large-scale pattern in this period."

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