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Futures Drop on Eve of Inventory Data

June natural gas futures posted nearly a double-digit loss Wednesday as traders discount expected additions to inventories below historical norms and note a weakening technical outlook. At the close June had fallen 9.3 cents to $4.577 and July had weakened 9.4 cents to $4.644. June crude oil swooned $1.81 to $109.24/bbl.

"I think the market will hold $4.55 overnight and we'll see where the [injection] number comes out. Today was not all that busy, but the market looked like it faded from a lack of bids. I think traders were expecting the market to come off a bit after last week's rally," said a New York floor trader.

"Depending on what the number is Thursday, I think we can squeeze it up to maybe $4.85, but if not, we'll probably head right down to $4.20." He added that the market was still in a trading range, and he thought people were just playing the range.

Technical analysts concur that the market is trapped within a range. "I ran my numbers on Friday and from a technical perspective the market is confined to this $3.80 to $4.80 range it's been in since December. Everyone started to throw out the bullish stories once the market passed $4.50, and that's when it looks like it will stall out," said a Washington, DC-based analyst.

"Yes, industrial demand is improving and yes, petrochemical producers are strategically advantaged, but in the end there is not a super-hot economy. The ag[riculture] world is doing OK, but the rest of the commercial sector is not doing so well."

He added that from a wave-count perspective the market was completing a near-term five-wave move higher from a low posted on April 11, and if that is the case, the short-term outlook is not supportive. "There's not much room left to move higher. Maybe an outside shot at $5," he said.

Whether or not there is room for the market to move higher may be determined by traders' reaction to Thursday's 10:30 a.m. EDT release of weekly government inventory figures. Expectations are for an injection below last year's 83 Bcf and the five-year average 78 Bcf.

Industry consultant Bentek Energy believes that its estimate of a 70 Bcf injection has a chance of being lower than the government's figure. The company said its "projection of a 70 Bcf injection is believed to have most of the risk to the high side for Thursday's EIA [Energy Information Administration] report. Strong injections were reported in the East Region, particularly into Dominion's system with a 9 Bcf build, up 80% from the previous week. Most Midcontinent facilities also reported strong injections during the week ended April 29, including ANR system, Blue Lake and NGPL. Northern Natural, also a Midcontinent facility, switched from withdrawals to injections." It added that there is the possibility of a "true-up" from the previous week when its projection was higher than EIA's number. This week it might be lower.

Forecasts carry risks and the company said, "Conversely, the risk of a lower injection would come from weather, as most weather-only models are projecting an injection in the mid to high-60s."

In its weekly report Bentek forecasts a build of 43 Bcf in the East Region, 22 Bcf in the Producing Region and 5 Bcf in the West Region.

Tim Evans of Citi Futures Perspective in New York also sees Thursday's storage figures lagging historical norms.

"Overall, we see the storage injections running below average for last week and this week, then above average for the week ending May 13 and near average in the week ending May 20. With storage flows as forecast, the year-on-five-year deficit of 11 Bcf as of April 22 would be a deficit of 32 Bcf as of May 20." Evans calls this a "gentle variation" from the five-year average. "In fact, if we go back to the year-on-five-year storage surplus of 5 Bcf back on Jan. 28, the swing to a 32 Bcf deficit on May 20 would represent a tightening of just 2.3 Bcf per week over that 16-week span."

For the week ended April 29 Evans expects an injection of 67 Bcf, well below last year and the five-year average, and for the weeks ending May 6 and May 13 injections of 71 Bcf and 101 Bcf, respectively, are expected.

He also suggested that a prolonged run to higher prices may have to wait for the onset of cooling demand and storm-induced supply interruptions. "Given the storage scenario, we see some potential for June futures to work into the $4.75-4.80 area over the next day or two, but with risk of a retreat back to the $4.00-4.25 zone in the weeks ahead as nuclear plants restart and we see some larger storage injections. The market may have to wait for more intense summer heat or hurricane threats to supply from the Gulf of Mexico before making a more sustained run at the upside."

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