May natural gas futures tested lower price levels in Wednesday morning trade before rebounding in a big way during the afternoon. After notching a $9.400 low, the prompt-month contract soared to a $9.950 high before closing out the day at $9.832, up 10.8 cents from Tuesday. May crude also rebounded Wednesday, gaining $3.85 to close at $104.83/bbl.

“With all of the recent indecisiveness, we are really seeing the market flip-flop between some significant gains and loses,” said a New York broker. “With the back and forth pattern, I wouldn’t be surprised if we saw a double-digit cent loss on Thursday.”

Traders continue to wrestle with offsetting bullish and bearish factors, which have left the market somewhat directionless with wide swings from day to day. After jumping 30.1 cents Monday, the May contract dropped 37.7 cents on Tuesday. The basic debate surrounds whether fundamentals — which many still deem bearish — can counteract the bullish fear that the funds might enact a massive round of short-covering, which could spike prices.

Some market technicians saw Tuesday’s 37.7-cent plunge to $9.724 as indicative of further weakness to come. According to Walter Zimmerman of United Energy, May futures were destined to fall, but “the ensuing retreat [Tuesday] should lead to further weakness this week. Our downside target is $9.255 (0.618 retracement of $8.664 to $10.210) to $9.200. He added that those in the bullish camp would see such a drop as a bull market correction and look for prices to continue advancing. “[They] would target another push to new highs to complete the five-wave advance from $6.838,” he said in a Wednesday morning note to clients.

Short-term traders were also expecting Tuesday’s market weakness. “This is what we were waiting for. Now that Q1 is out of the way the market should get weightier,” said a New York floor trader.

“The market doesn’t belong up here. There is more [premium] that needs to be taken out of the market. I think there is some big money that needs to get out of the market; $9.450 is the next support level,” he said. Following Wednesday’s session, it appears futures did indeed find support in that general area.

Natural gas bulls may take some solace in data showing a somewhat stronger economy. Tuesday’s release of Institute of Supply Management manufacturing survey data showed a reading of 48.6%, slightly higher than the 48.0% initially anticipated. A reading above 50% indicates increasing manufacturing activity.

Turning attention to Thursday morning’s storage report for the week ended March 28, most people within the industry are expecting the Energy Information Administration (EIA) to report a withdrawal in the mid to high 30s Bcf area. A Reuters survey of 21 industry players produced a range of pull expectations from 25 Bcf to 58 Bcf with an average draw estimate of 35 Bcf. Strategic Energy & Economic Research Inc. analyst Ron Denhardt is calling for a 38 Bcf pull, while Barclay’s Capital is looking for a 34 Bcf draw.

Golden, CO-based Bentek Energy said its flow model indicates a withdrawal of 30 Bcf, bringing stocks 27.1% below the five-year high and 0.4% above the five-year average. The research and analysis firm expects to see a 34 Bcf draw out of the East region, but 2 Bcf injections in both the West and Producing regions.

The number revealed Thursday morning at 10:30 a.m. EDT will also be compared to last year’s 35 Bcf injection and the five-year average draw of 2 Bcf. A withdrawal in Thursday’s report of 35 Bcf or more would effectively erase the year-over-five-year average surplus.

With the current storage level sitting just above the five-year average and well below where the industry expected it to finish the withdrawal season, some analysts note that there is a current debate as to whether storage can be refilled to comfortable levels during the injection season in time for winter 2008-2009.

“While the weekly storage stats published by EIA still consider activity during the last week of March, most of the market has moved on by now, looking forward to the eventual start to spring, which seems not to have hit the northern states quite yet,” analysts George Hopley and Michael Zenker wrote in a Barclays Capital research note. “Even further lagged is the recent release by the same information administration of its take on January 2008 natural gas production in the U.S. In contrast to most of the trend higher during 2007, which saw local gas production surge from 53,500 MMcf/d in January to 57,740 MMcf/d in December, the most recent monthly stats for January [2008] show a slight pullback, down 600 MMcf/d.

“The question before the market now is, what will be the performance of U.S. producers during 2008? The answer carries more importance than just satisfaction of curiosity, given the now challenged state of starting inventory. Should a repeat performance come this year, the U.S. gas market may appear more balanced in October and prices may stage a retreat from the current lofty levels. However, should 2007 remain a standout, only to be followed in 2008 by meager gains in gas output, the forward curve may rightfully reflect the tight nature of fundamentals.”

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