Natural gas futures dropped a second consecutive day on Wednesday but some veteran market watchers remained unimpressed, noting that they believe the near-term bottom to the market at $3.810 was recorded last Thursday.

The May contract on Wednesday traded between $4.173 and $4.010 before closing out the regular session at $4.019, down 7.7 cents from Tuesday’s finish. After moving a combined 40.8 cents higher on Thursday and Monday, the prompt-month contract has since given back 25.8 cents. Even with the mercurial rise and fall of prices, Hencorp Futures broker Tom Saal says he believes the move’s lows are safe.

“Despite the last two days of drops, I still think the market has bottomed out short term and that we are headed higher,” he told NGI. “I believe we’ll see some incremental demand come on as utilities and storage operators refill inventories going into summer. It really looks like we are in nothing more than a shoulder-month lull.”

Saal said the recent news that the Energy Information Administration (EIA) is revising downward its U.S. production figures and changing its 914 report methodology has provided a good snapshot of where the market is (see Daily GPI, April 7). “I think we’ve put a bottom in here. Looking at Market Profile, we saw a nontrend-day pattern Wednesday where the market does not extend beyond the first hour’s trading range,” he said. “This typically means that long-term sellers have pretty much stopped selling. Once the longer-term sellers stop selling, you get the weak shorts coming in at the end of the move, but they don’t stick around for long. When the EIA announced its methodology problems, traders covered their shorts and the market went up very fast. Because the reaction was so swift, I think it goes to show just how tapped out this thing is to the downside right now.”

Taking a peek at Thursday’s natural gas storage report for the week ending April 2, it appears much of the industry is expecting the EIA to report an injection in the mid to high 20s Bcf area. A Reuters survey of 25 industry players produced a range of injection estimates from 15 Bcf to 40 Bcf with an average build expectation of 29 Bcf. Bentek Energy is projecting an injection of 23 Bcf, which would bring inventory levels to 1,661 Bcf. The research firm expects a 16 Bcf injection in the Producing Region with the West and East regions chipping in 4 Bcf and 3 Bcf, respectively.

The number revealed Thursday morning will be compared to last year’s date-adjusted 17 Bcf addition and the five-year average build of 11 Bcf.

In spite of the large amount of short open interest held by funds and managed accounts, others in the industry agree with Saal that the downside appears limited.

“We seem to have reached the point of diminishing returns for the big, bearish investment and trading funds. Strangely enough, we do not see any real fundamental strength on the horizon, but we do see a tired bear move that has fully discounted every bearish piece of information available,” said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm.

Beutel concedes that the market is a long way from any sustained advance, and “trading activity could be volatile, with plenty of ‘rug-pulling’ from under the bulls, but we expect that the bigger moves will start to accumulate on the upside in natural gas. Prices ‘deserve’ to be substantially higher than $4/MMBtu. They might have trouble getting and staying above $5/MMBtu, but bids seem likely to chase offers further up the grid.”

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