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June Pushes Higher on Technicals, Rig Count

June natural gas futures rose Friday as traders saw the market showing some short-term technical strength and gas-driven rig count figures showed a sizeable drop. At the close June had risen 5.2 cents to $4.246 and July added 5.5 cents to $4.311. June crude oil added 68 cents to $99.65/bbl.

Short-term traders see the market showing technical strength; "$4.11-4.12 was right at one of the moving averages we follow and it held that," said John Woods, president of J J Woods and Associates. "It did a good job, it got down there, it held and I think it is poised to move higher from here.

"I think the market is well bid [at lower levels] and the days of $4 natural gas are over. It does look like we are rangebound here, but I wouldn't be too surprised if we took another shot up around $4.50. You have to be patient. I don't think it is going to go screaming up there and it might take a week or two. Once up there, though, traders will be inclined to dump it. It was a positive sign for the bulls that the trend line was not broken, but I look for the market to fail right around $4.50."

Woods is not alone. According to a Bloomberg survey, five of 12 analysts forecast that gas futures will advance on the New York Mercantile Exchange through May 20. Four said futures will fall and three predicted that prices will stay the same. Last week 59% said gas prices would decline.

Should natural gas prices rise, it will likely not be due to any assistance from short-term weather patterns. MDA EarthSat in its six- to 10-day outlook predicted that above-average temperatures would be limited to portions of New England and Canada, and the bulk of the U.S. would see average temperatures with below-average temperatures confined to the western states.

"A combination of warmer changes and progression have warmed the composite such that below-normal coverage is much lesser today. The strongest cold will be at the onset, both along the West Coast and in the Midwest, where a final day or two of much-belows should linger," the firm said. It added that meteorological phase changes and changes in the trend of the PNA [Pacific North American pattern] "should allow the warmth to expand eastward across the North, while also gradually warming the South. The exact timing and details of these trends is still somewhat uncertain, however, keeping confidence only moderate."

Natural gas bulls also got some help in the form of updated figures from the Baker Hughes weekly rig count. For the week ended May 13, rigs drilling for gas fell by 16 to 874, well below the year-ago level of 951. Total horizontal wells increased by three to 1,041, smartly above last year's 776 tally, and U.S. total wells slipped six to 1,830 but remained above year-ago levels of 1,506.

Top analysts see the market attempting to reconcile abundant production, fund positioning and the outlook for increased industrial production. "With this market still in the throes of the shoulder season in which the weather factor has diminished, we still feel that fund positioning will be determining near[-term] price direction. The activities of the large speculators, in turn, will be heavily influenced by any dramatic swings in the oil and metal markets," said Jim Ritterbusch of Ritterbusch and Associates.

"As a general matter, an elevated pace of production remains as a significant bearish force, one capable of precluding sustainable price rallies. But as a counterpoint, demand from the industrial sector across this year appears capable of steady gains of as much as 2% and since this sector represents 1/3 of total natural gas consumption, it could be enough to keep prices elevated above the $4 mark going forward," he said in a morning note to clients.

Market technicians saw the possibility of higher prices Friday but cautioned that any rise will be bucking up against a longer-term trend pointing lower. "With a potential doji star bottom on the daily candlestick chart and bullish divergence on the intraday RSI [Relative Strength Index] (14 bar period) a turn higher is possible into the end of the week," said Brian LaRose, analyst at United-ICAP. He also noted that "the longer-term trend still points to a retest of $3.731 [and] any rally from here will be viewed as corrective. Fail to rally Friday and $3.944 (0.7862 of $3.731-4.729) will be our next downside target."

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