June natural gas futures rose in light trading Monday as traders reacted to forecasts of warmer weather but at the same time are seen as moderating their market exposure. At the close June futures had gained 11.6 cents to $4.346 and July was up 10.3 cents to $4.393. July crude oil sank $2.40 to $97.70/bbl.

"We staged a nice little rally off the lows, and the consensus is that we can make it up to the low $4.50s," said a New York floor trader.

He added that there may be the possibility that traders were buying natural gas and at the same time selling crude oil in a spread trade. "They may also be rolling out of a crude oil position into natural gas.

"We held the upper $4.20s as prices advanced and traders are beginning to like the market."

Technical traders see the market trading within a broad triangle formed by a series of higher low prices from September 2009 when spot futures posted a low of $2.409 and a series of lower high prices from January 2010 when prices traded as high as $6.108.

According to Walter Zimmermann of United-ICAP, "it is entirely possible to have plenty of price action yet no direction. To gain a direction natgas needs to break out of this 'cone of silence' triangle congestion." He added that he is "still targeting $3.580-3.560 if the $4.000 level fails to hold, [and] $3.580 is right in the vicinity of the triangle support."

That lack of direction may be what's causing traders of both stripes to lessen their market exposure. The Commodity Futures Trading Commission in its Weekly Commitments of Traders Report showed that for the five trading days ending May 17 managed money reduced holdings of both long and short futures and options positions. At the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) fell 26,883 to 375,053 and short contracts increased by a mere 645 to 38,549. At the New York Mercantile Exchange (10,000 MMBtu per contract) long futures and options fell 7,362 to 130,960 and short contracts dropped 13,754 to 213,098. When adjusted for contract size, long futures and options at both exchanges fell 14,082 and shorts decreased by 13,592.

For the five trading days ended May 17 June futures fell 6.4 cents to $4.182.

Near-term weather forecasts have something of a bullish flavor. According to WSI Corp of Andover, MA, during the 11- to 15-day period, "Above-normal temperatures are expected across much of the east-central and southwestern U.S. during the period. Below-normal readings should be confined to portions of the West Coast. Temperatures may still run warmer than currently forecast over much of the country, particularly from the northeastern through north-central U.S."

Top analysts see the fundamentals of the market as being uninspired but nonetheless offering trading opportunities. "The fundamentals continue to be a drag on the gas market," said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm. DeVooght still sees opportunities in what has become a relatively low-volatility market.

"On a trade basis we will continue to use rallies into the high $4 level as a selling opportunity, primarily utilizing collars and selling call premium," he said. "If we break back under $4.15 (filled last week), we will book profit on the short calls and sell put premium. Not exciting, but the best way (in our opinion) to trade this market until we get a break of the range. We will continue to hold our current collars and will look to sell calls if we trade back above $4.60 or sell puts if we break below $4.15."

At present DEVO trading accounts are short July $4.10 put options initiated at 14-15 cents, and end-users are also holding the same position. Producers and those with exposure to lower prices continue to hold a June-October strip consisting of $4.50 put options offset by the sale of $5.50 calls at even money for 10% of market exposure.

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