In another in a string of volatile trading sessions, natural gas futures climbed higher early in the session Tuesday in sympathy with crude oil and in anticipation of a potentially bullish storage report Thursday, only to be dumped lower in the afternoon as traders realize that winter is starting to release its stranglehold on the market.

The April contract finished at $7.041, down 12.1 cents for the session and roughly 6 cents below major support at $7.10. However, the day was not a complete wash for bulls as gains in the out months allowed the 12-month strip to advance 2.6 cents to $5.775.

Fueled by a technical bounce following Monday’s 94-cent free fall, the April contract was higher in Monday overnight Access trading. That buying received a boost in regular open outcry trading when the April crude oil contract gapped higher at the opening bell en route to a more than dollar advance for the session. Crude traders agreed that the market was due for a rally following three straight down days on hopes that war with Iraq could be averted. April crude finished the session at $36.89, up $1.01 for the session, but still well below the spike high from last week of $39.99.

For the second day in a row, the weather forecasts helped to induce some extra volatility into the market. Although still calling for below normal temperatures for the northern half of the country in its latest six- to 10-day forecast, the National Weather Service also looks for a large area of above normal temperatures for the South in its eight-to 14-day outlook. Clearly the weather forecasts were open to interpretation Tuesday.

Also a source of concern this week is the Thursday release of fresh storage data. Kyle Cooper of Salomon Smith Barney calls for a 170-180 Bcf withdrawal, but notes that it is possible that curtailed industrial use in reaction to high price levels could prompt a bearish draw of less than 165 Bcf. On the upside, Cooper says that a withdrawal of greater than 200 Bcf would be “incredibly bullish.”

Looking ahead, Tom Saal of Commercial Brokerage Corp. in Miami believes the next several storage reports will dictate price direction over the next several weeks. “The market is apprehensive on both sides…It’s kinda like a big game of chicken,” he said pointing to the battle between those who wish to sell the market now that winter is coming to an end, versus those who wish to buy the market on soon-to-be record-setting low storage levels.

And while it appears the weather sellers have had it over the storage buyers as of late, that may only be part of the picture. In an attempt to keep up with the growing risk of default as prices have rose to the stratosphere, Nymex has more than doubled margin requirements through its four rate hikes in 10 days. The latest increase, which took effect at the close of business Tuesday, raised the margin for natural gas futures to $12,500 from $11,000 for clearing members, to $13,750 from $12,100 for members, and to $16,875 from $14,850 for customers. Margins for the second month will increase to $10,500 from $9,000 for clearing members, to $11,550 from $9,900 for members, and to $14,175 from $12,150 for customers. Margins for all other months will remain unchanged, the exchange said.

For Saal, these margin hikes have apparently prompted non-commercial traders to reduce their exposure. “Funds have a set amount allotted for each commodity. An increase in the margin requirement could serve to limit their overall participation in the market.” Looking at open interest figures, Saal may be on to something. Since the price peak on Feb. 25, open interest has fallen to 389,104 from 422,294.

And although the latest Commitments of Traders data released Friday by the Commodity Futures Trading Commission offers up data only through Feb. 25 and thus does not capture the bulk of the margin hikes, it does reveal that non-commercial traders have begun to liquidate their long positions. Specifically, the Commission’s data shows that since peaking at 32,944 on Feb. 11, the funds have more than cut in half their net long holdings and as of last Tuesday held a rather nominal open interest net long of 14,227.

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