Adding to its 52.4-cent drop on Monday, April natural gas on Tuesday continued to probe lower in search of support. The contract set a high for the day of $6.800 in the morning and recorded a $6.580 low in the afternoon before settling at $6.714, down 7.5 cents on the day.

While crude futures have been recently teeter-tottering based on tensions in the Middle East and Nigeria, natural gas futures continue to face the stark realities that storage levels are at a record high for this time of year and that winter 2005-2006 included only one semi-cold month.

“I think we will be in this choppy range for a little while,” said a Washington, DC-based broker. “While slightly below $6.500 wouldn’t surprise me, I don’t think we are going to the sub-$6 area. Despite the current weakness in the market and the plentiful amount of gas in storage, markets are forward-looking instruments and we are approaching the shoulder season, which is where rallies historically start from.”

The broker noted that rallies, like sell-offs, are often confusing when they start. “Everyone gets accustomed to the current market weakness and then all of a sudden there are a couple of days of price-rises that don’t seem to make sense. That’s called the beginning of a change in direction.

“I’m not saying we are there yet. I still think we are probably weak, as none of the short-term momentum indicators we look at have shown a turnaround. On the other hand, I really don’t think $6 is going to be taken out either.”

Commenting on the $7 support break on Monday, the broker said he didn’t think it was the result of a flood of new short-selling. “I don’t think there were sell stops going off or anything like that. I do know that our end user clients — as represented by marketers — have been very busy,” he said. “We have been doing a lot of business…and the business isn’t in small chunks either. The buyers are there. From our perspective, demand has not been completely crushed.”

Summing up the market’s trajectory over the past seven months, the broker equated natural gas futures to a “bobbing cork” that fluctuates up and down. “Over the past number of months, we’ve had a huge spike up and a huge reaction down,” he said. “It is like a cork bobbing around, but that is what the market does. The market will find a value that things can get done at. Whether it is $6.25 or $6.75 isn’t the bigger issue. The fact that downward momentum has slowed is key.”

Analysts suggest that at some point in time the selling may come to an end as natural gas becomes ever more competitive on a Btu basis. “Some sort of significant price rally is expected, [although] that rally may develop from even lower levels, as the fundamentals remain very bearish. Natural gas has become still cheaper to petroleum products on a Btu basis,” said Kyle Cooper of Citigroup.

Others agree on the likelihood of a rally. “I suspect there will be a short-covering rally that will be a little bigger than most people think,” said Tom Saal of Commercial Brokerage Corp. in Miami. He noted that from what price, and when, were still indeterminate, but there were several factors in play capable of contributing to a rally. “The funds are short, there is a little bit of supportive weather, and there are always developments in the Middle East that could surface.”

Last year the market traded sideways, and the price action built a textbook bell-shaped curve. “The market has been in a free-fall and hasn’t yet developed a base. That is what we are looking for now, and obviously we are not getting it,” Saal pointed out. In a longer term perspective to determine if the market is going back to $10 or is on its way to $4, a basing pattern or development of a bell-shaped curve is necessary. That could take several weeks to develop, Saal said.

Funds and managed accounts appear ever more willing to push the short side of the market. On Friday, the Commodity Futures Trading Commission reported that as of Feb. 21, noncommercials held a net short position (futures only) of 46,637 contracts, up sharply from the 38,987 held short a week earlier.

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