Front-month natural gas futures spent their second consecutive day below $4 as traders continued to come to the realization that the United States might be working its way into an oversupplied situation. One day ahead of expiration, the April contract reached a low of $3.863 on Friday before closing at $3.872, down 10.9 cents from Thursday’s close and 29.7 cents lower than the previous week’s finish.

“I can’t say I’m surprised that we’ve crashed below $4 and stayed below that price level,” said Steve Blair, a broker with Rafferty Technical Research in New York. “There was some pretty significant open interest in the $4 puts going into option expiration Friday, which means there was a lot of incentive for people to keep this market under $4. In addition, when storage switches from withdrawals to injections two weeks earlier than normal, what do you expect? With increased LNG [liquefied natural gas] cargoes and the ramp-up in shale gas production, we’ve got an awful lot of gas…as evidenced by the early injection. While some people are targeting $3.820 as support, our major support comes in at $3.660. It should be an interesting futures expiration Monday.”

Blair said producers are beginning to realize the current oversupply dynamic. “I know there is talk that some of the producers are shutting down some of their rigs because it is uneconomical to produce at these prices [see Daily GPI, March 26], but we’re going to have to see a lot more of this if we’re going to be able to reverse this market,” he told NGI. “With all of the gas we’re seeing, Barclays is talking about the very real possibility that we are going to run out of storage space before the end of this injection season [see Daily GPI, March 25]. If this comes true, prices would likely dump because that gas with nowhere else to go would flood the market.”

Blair said he believes prices could return to last year’s low. “Barring any major disruptions from tropical weather, I don’t see any reason we won’t repeat last year’s cycle and get down to that $2.500 level. I know we got down to $2.409 last year, but that was in overnight trade. We’re using $2.500 as the measuring stick for major long-term support.”

From a technical perspective Thursday’s breach of $4 support was considered significant, and typically when markets develop significant trends earlier support points become areas of market resistance. Such may be the case, technically at least, for nearby futures. Others also see a tough road for the bulls.

“The only glimmer of hope for the bulls is the RSI [Relative Strength Indicator] divergence now visible on the daily chart,” said Brian LaRose of United-ICAP. RSI divergence should hardly be cause for glee for those searching for price strength. “This is not enough to suggest a reversal is imminent. Unless we see additional warning signals begin to flash, the trend will be down. Peg $3.822 (0.618) as the next hurdle for the bears. If this level can be broken, natgas would have room down to $3.200-2.955 (0.7862 and 0.852),” he said.

Economy watchers were somewhat disappointed with the 8:30 a.m. EDT Friday release of fourth quarter gross domestic product (GDP) data. The Commerce Department reported that Q4 GDP rose at a 5.6% seasonally adjusted annual rate, slightly below the 5.9% measured a month ago and below expectations of 5.9%. One of the shortcomings of quarterly GDP measurements is that they tend to be quite volatile; consequently, economists also like to look at the year-over-year growth in GDP. The yearly changes tend to be more stable. On a year-on-year basis GDP growth is slightly above zero.

Natural gas bulls may take some heart in that broad measures of economic growth, such as an improved GDP, may finally be filtering down to industrial demand for natural gas. The American Iron and Steel Institute reported to the Energy Information Administration that gas-intensive steel production is showing modest increases. February 2010 raw steel production rose to 232,000 tons per day, up from January’s 223,000 tons.

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