April natural gas futures reached $10/MMBtu on Friday as many market insiders had been expecting this week, but the visit was short-lived as the prompt-month contract beat a hasty retreat. After notching a low of $9.705, April ended up closing at $9.769, up 2.7 cents from Thursday’s close and 40.3 cents higher than the previous Friday’s close.

With front-month natural gas climbing $2.03 since the beginning of February, market participants continue to debate the cause. While some point to supportive fundamentals, others blame the influx of new speculative money coming into the commodities market.

“I don’t know whether the run-up to $10 coincided with a little rally in crude or not, but we still have cold weather and below-average temperature expectations in the eight- to 14-day forecast,” said a Washington, DC-based broker. “We certainly have some fundamental support behind this move. We are working down storage supplies, and I would call the supply-demand picture pretty bullish. It is certainly less short-term bearish than it was eight months ago when we had the big storage overhang.”

He added that traders are likely to try and take advantage of the Btu price differential between natural gas and crude. April crude closed Friday at $105.15/bbl, which roughly calculates to $17.525/MMBtu, or a $7.756 premium to April natural gas futures. “You also have to remember that someone is going to redo the calculation on how many Btus you get for a contract of natural gas versus for a contract of crude oil,” the broker noted. “They are going to find that one is underpriced and one is overpriced and decide to arbitrage the difference.”

The broker added that new money is definitely coming into commodities from the equity arena, but he does not believe it is in bubble mode. “There is still more room for money to flow into the commodity indexes. I don’t think we are in the bubble mentality yet.”

While front-month futures soared above resistance at $9.820, the broker said the key point on the day is that the market did not settle above it. “I would say right now we are in a moderate uptrend, not a hyperbolic uptrend. We might be ready for a little pullback down to the trendline before another rally that might take us convincingly through $9.820. That is our first number to get through, and I think it will happen because this move up has not felt labored yet. If we get above $9.820, $10.350 is one of our technical objectives, followed by $11.600. We do think this is probably the last part of the advance that we have been in since late August 2007. When this completes, whether it be at $9.820, $10.350 or $11.600, we expect a more significant setback, which will be more than a correction in a bear market. First things first, we have to find the top.”

Going into Friday’s session, technicians and analysts were seeing both a strong fundamental and technical undertone to the market. “To begin the week, we were expecting an immediate rally to our $10.200 to $10.400 resistance zone or a failure near $9.870 leading to a few weeks of congestion,” said Walter Zimmerman of United Energy. He conceded the bearish argument that might consider the April contract’s failure to breach $9.876 as “failing at resistance,” but Zimmerman still sees the bullish case intact. Unless spot futures can “manage a 40-cent decline,” the weekly candlestick pattern indicating a market top will not be confirmed.

Those who closely analyze supply-demand figures also see prices advancing. “We still view the ongoing dynamic of a major contraction in the supply surplus as capable of supporting the front of the curve despite this late stage of the heating cycle,” said Jim Ritterbusch of Ritterbusch and Associates. He noted that Thursday’s release of inventory figures showing a somewhat-below-expectations 135 Bcf withdrawal may have dampened buying, but “the supply excess against five-year average levels has shrunk to a mere 63 Bcf and an erasure of this remaining surplus is looking increasingly likely by month’s end.

“All factors considered, we expect further price strength while also suggesting that some late-winter cold temperature updates may be required to push values appreciably higher at the start of [the coming] week,” he said in a note to clients.

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