Natural gas futures are within striking distance of new 10-week highs, after traders bid up the market Thursday morning on price-constructive technical factors. After filling in the nagging $2.51-55 chart gap on Wednesday, the April contract rallied at the close to notch a new eight week high at $2.585. However, that was only the beginning, because the contract gapped higher in Thursday morning, as buy-stops initiated a wave of computer-generated fund buying. Light profit-taking at the closing bell shifted the prompt month off its $2.82 high. It closed 19 cents stronger at $2.756 amid extraordinary estimated volume of 158,816.

According to the American Gas Association, 132 Bcf was pulled from storage last week, which was inside the 110-160 Bcf range of expectations. However, versus both the 64 Bcf withdrawal reported last week and last year’s 73 Bcf drawdown, Wednesday’s figure was undeniably bullish, giving buyers the go-ahead to press prices to new two-month highs. Storage now stands at 53% full with 1,748 Bcf of working gas versus 786 Bcf at the same time last year and 1,178 Bcf on average over the last five years. In absolute terms, the 962 Bcf year-on-year surplus is at its lowest level since mid-December. However, as a percentage of gas left in the ground, the surplus is at a new high of 55%.

The latest Short Term Energy Outlook released by the Energy Information Administration also was friendly to the bulls. Citing an expected end-of-withdrawal-season inventory of 1,541 Bcf, the EIA expects prices to dip in the near term. However, “by late 2002 or early 2003 the economic recovery and further declines in natural gas production capacity are likely to cause an upturn in natural gas prices to levels well above current prices of about $2.50/Mcf.” EIA also projects that natural gas wellhead prices will rise about 60 cents/Mcf next year to $2.68/Mcf on average.

Another factor that undoubtedly played into the market’s price strength was the rally in the nearby hydrocarbon complex. Concerns that the U.S. is moving closer to military action against Iraq surfaced overnight Wednesday when satellite images were submitted to the UN Security Council sanctions committee depicting trucks, intended for humanitarian aid, had been converted to military use. April crude finished 56 cents higher at $23.71 while heating oil posted a 1.96-cent advance to $.6189

While fundamentals ultimately will decide the fate of prices, technicals are in control right now, analysts agree. “We took out the last (highest) long-term downtrend line on Wednesday, said Tom Saal of Pioneer Futures in Miami. “Now we have the uptrend line formed over the last couple of months.” Looking ahead, Saal is in a wait-and-see trading mode. “The one thing I have learned from the run-up of 2000 is that you do not want to sell into a market that is moving vertical. Prior to 2000, you could say that selling against a $2.80 high is a pretty safe bet, but that is not the case anymore. In the famous words of esteemed Merrill Lynch commodity technician from the 1980s and 1990s John Gambino, ‘Forget what you believe and believe what you see’,” Saal said.

Despite the market’s impressive price action Thursday, Tim Evans of IFR Pegasus in New York is unmoved. “Thus, parallel to petroleum markets, we view [Thursday’s] jump in natural gas prices as a likely blow-off top, with projected resistance at $2.80-82 revealed as the chosen objective… On the downside, failed resistance at $2.58-60 is first support, followed by additional buying at $2.46-50 ahead of Wednesday’s $2.435 low.”

To take advantage of the potential move lower, Evans looks to use an aggressive $2.68 sell-stop to enter a 50% short position in April. A $2.84 buy stop will limit his risk.

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