Coming off a Monday that featured a jittery Wall Street and a titanic tumble in energy commodities, April natural gas futures on Tuesday went into correction mode as some traders suggested that a more sideways-trending market coupled with high volatility lies ahead in the near term. The prompt-month contract reached a high of $9.420 before closing out the day at $9.414, up 31.4 cents from Monday.

April crude also rebounded nicely Tuesday, aided by a late push sparked by news that the Federal Reserve slashed a key interest rate by three-quarters of a percentage point in an effort to jump-start the U.S. economy and restore faith in financial markets (see Daily GPI, March 18). April crude reached a high of $109.50/bbl before settling Tuesday at $109.42/bbl, up $3.74 from a day earlier.

“I think the Wall Street turmoil is certainly helping to influence commodity prices,” said Tim Evans, an analyst with Citigroup in New York. “Slower economic growth or even economic contraction is not going to translate into rising demand, or higher prices for that matter. A lot of people in the financial world are really waiting for the other shoe to drop, but I would love to know exactly how many feet this monster actually has. I think one of the things that we have demonstrated recently is how much market valuation depends on how we are feeling. While it is commonplace to say it is market sentiment that drives price in the near term, we just had a demonstration on how that can mean nothing but offers on Monday and nothing but bids on Tuesday. Neither day is a secure place to be trading.”

Evans added that he believes the natural gas market is also taking some of its cues from crude futures. “Crude gives natural gas a kind of secondhand support related to the Fed interest rate cut and the weakness of the U.S. dollar,” he told NGI. “While the relationship between those two commodities is not always reliable, I think it ties them together here.

“I think Tuesday’s rebound in natural gas was somewhat corrective. I think people realized that a 76-cent drop was too much, so they clawed some of it back. The weather forecast did not change very much from Monday to Tuesday for the United States, but Europe’s temperatures could bear watching. Europe is going to be colder than normal over the next 15 days or longer, so a couple of brokers I spoke to are wondering about the impact on LNG [liquefied natural gas] cargoes and whether there could be an impact to U.S. gas prices.”

As for natural gas futures prices hovering near $10, the analyst said he sees the price level as middle-of-the-road. “One reason we are at $9 to $10 is there is risk of a further short-covering spike that could take us to a number like $13. This lies in contrast to the fundamentals, which really might point to something like a $7 price,” Evans said. “Why are we at $10? Because there is a risk of $13 and a risk of $7. From a fundamental perspective, it would be an easier call if we were trading at $7 to try the long side of the market, or we are at $13 and decide to look for a short sale. Then I am much more confident that we are near a price extreme. Right now I have more of the feeling that we are just in the sloppy middle.”

With the recent volatility, Jim Ritterbusch of Ritterbusch and Associates said his market outlook is neutral and is “now anticipating a wide-swinging market within an approximate range of about $8.800 to $9.680 per May futures.” Ritterbusch believes that lower-than-expected storage levels have now been factored into the market and “this market will likely be influenced more by oil price swings and financial developments than by fundamentals, especially with the approach of the low-demand shoulder period,” he said in a Tuesday morning note to clients. May natural gas closed 30.7 cents higher Tuesday at $9.504.

The bullish weather case is still in place. AccuWeather.com’s six- to 10-day forecast calls for below-normal temperatures for the entire U.S. east of a broad arc extending from North Dakota to West Texas. Arizona, Southern California and southern Nevada are forecast to be above normal, and the remainder of the country is expected to be normal.

“Did we mention that gas prices are volatile?” questioned analysts at Barclays Capital in a research note. “The entire energy complex took a big step back [Monday]. More importantly, the pullback was registered deep across the curve, with prices falling an average 77 cents through 2008, 68 cents in 2009, and by similar amounts out into 2010. No single fundamental variable accounts for this scale of price change. In fact, news relating to natural gas, especially weather, is generally bullish. Rather, a number of factors affecting energy broadly, and the macro markets in general, contributed to the sentiment.”

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