Despite a positive open and stronger cash prices, natural gasfutures slumped into the weekend as traders surveyed the prospectof more bearish news this next week in a market that many feel isalready overvalued. After opening at $2.81 the prompt contract wasunable to muster much in the way of upward momentum, and that setthe tone for a choppy, range-bound trading session. April finisheddown 1.2 cents at $2.774. Estimated volume confirmed the lacklustertrading, as only 43,848 contracts changed hands.

With little to comment about Friday’s session, traders took theopportunity to take a look at how we arrived at the current pricelevel and also to speculate on the direction of prices headingforward. For many, the three-month, 75-cent price rise has beenfueled by the nagging uncertainty of whether supply will be enoughto match demand, both this winter and this upcoming summer. Andwhile it appears the market has made it through winter, the jury isstill out on summer, when lower nuclear utilization rates areexpected to mix with continued diminished deliverability. And that,says Tom Saal of Miami-based Pioneer Futures, is exactly how wewound up here. “There has been a persistent concern for the pastsix months that there is not going to be enough gas and prices havereacted accordingly,” he said.

However, that upward bias may have been dealt a blow recently.According to the American Gas Association, only 103 Bcf has beenwithdrawn over the two weeks prior to last week compared with 197Bcf last year. Storage is now 61 Bcf more than the six-year averagefor this time of year. And many feel it will only get worse withthe next report. According to the New York-based PegasusEconometric Group, the market will be hard-pressed this week tocome close to the 134 Bcf draw seen last year and that, along withthe re-emergence of above-normal temperatures, makes the groupskeptical of further advances.

Saal agrees with their storage assessment and even goes as faras predicting a 5 Bcf net injection this week. “The [consumingregions] East and West will see a modest withdrawal, while theproducing region will see sizeable injections,” he said. And whilea storage report like that would normally be extremely bearish froma fundamental perspective, he doesn’t think the market will care.”Storage didn’t matter [last] week. What makes you think the marketwill care this week? It will just blow it off again.”

With fundamentals out of the picture, Saal believes the marketcould press forward, ushered by another wave of non-commercialbuying. “The funds are clearly adding to their length. They havebeen relatively dormant recently, but they have once again turnedinto aggressive buyers.”

Referencing the Commitments of Traders report released Friday,Saal notes that non-commercial traders are long more than 35,000 inopen interest compared to less than 25,000 just two weeks ago. “Thelast time they were this long was back in August, when the markettopped out above $3.10. If they add another 10,000 [positions], I’dsay we hit $3.00, no problem.” Add that to the fact that there areplenty of unhedged shorts out there, and you have the potential forsome real upward momentum, he continued. “If you are an end-userright now, the trend is not your friend.”

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