Under significant downward pressure from the weak crude oil market and continued spring weather, April futures opened 24.7 cents lower Tuesday and more than wiped out the two previous daily gains with a solid 16.8-cent drop to close the day at $5.339.

Nymex April crude plummeted nearly 10% ($3.26) to $31.67/bbl as traders apparently became convinced the war with Iraq will be over swiftly and crude will continue to flow abundantly.

Meanwhile, April natural gas futures attempted to climb back up to Monday’s close but quickly failed and traded sideways in the $5.30s most of the day. The low was $5.25 and the high was $5.490. May ended down 12 cents to $5.32; June was off 11 cents at $5.26, and July was down a dime to $5.22.

Despite the apparent resumption of the downtrend, bulls are still betting the market is oversold and key support around $5 will hold. Tim Evans at IFR Pegasus is convinced that “the next dollar is going to be on the upside” and the $5.08 low reached last Friday is a solid candidate for a bottom in this market.

“I think there is a higher chance of us trading to $6.00 or $6.30 than there is of us trading to $4.00 or $4.30,” he said. “The drop we had does relate to the weather, but you look at where we are in storage — 721 Bcf, and we’re probably going to be at 640-650 Bcf after Thursday — and you [have to expect higher prices].”

Craig Coberly at GSC Energy in Atlanta also is still holding onto his bullish outlook. “Measured from the $5.08 low, the short-term and intermediate term outlook is for gas to move higher,” he said. “Rallying into the $6.86-$7.28 [area] is a reasonable expectation over the next couple of weeks. The first chore for this bullish outlook is to keep prices above the $5.08 low… Trading below $5.08 would invalidate the bullish outlook and focus attention on $4.80 as the next level of support.”

According to the bears, even though prices have collapsed $4.76 from the $10.10 high only three weeks ago, they still have to come down to create an incentive to inject gas this summer. “There is a reason this has to happen,” said Tom Saal of Commercial Brokerage Corp. “There is no forward carry in the market. The winter strip is $5.28 and the summer strip is at $5.24. There is no incentive for marginal injections. The utilities will be putting it in the ground, but there’s no storage arbitrage play as we speak. The marginal storage player will not be buying gas. That should be bearish.”

In order for the market to create an incentive to inject gas, either the winter strip has to rise or the summer strip has to fall or both. “In two out of three cases, the summer goes down, and that’s why I’m bearish,” said Saal.

However, he also has cautioned his clients, most of whom are buyers, to protect against a potential retracement of 25-33%. “It’s going down. It may bounce around here through calendar March and into April, but it is eventually going down into the $4s or lower,” he said. “It was $1.76 [eighteen] months ago. It’s not like it was $10 for a year. We’ve seen this movie before. I lived through the 2001 market. It blew back down to $5. We fell from $10.10 in December of 2000 and at March and April it stopped around $5 and then bounced around a little bit and then continued to grind lower. By [Sept. 26, 2001] it was $1.76.”

Saal sees psychological support around $5 and chart support at the $5.08 low the last time the market fell. “But longer term, it looks pretty bearish.”

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