In its first regular front-month session, the June natural gas futures contract on Tuesday took a break from the recent spike to test out lower price values. The contract dipped back below $11 to record a $10.830 low before settling at $10.842, down 48.7 cents from Monday’s close and 43.8 cents lower than May’s expiration.

“After the last several weeks of the elevator moving straight up, I guess it was finally time for the elevator to drop a few stories,” said Tom Saal of Commercial Brokerage Corp. in Miami. “While it could signal the end of the move higher, I don’t think we are there quite yet. Resistance currently sits at $11.080, so we’ll have to see what happens when and if we get back up there.”

Citing reasons for the significant price hike over the last few weeks, which has seen the front-month contract jump $3.800 since the beginning of the year, Saal said a number of factors are in play. “I think it was a combination of new fund money coming into the market, the continuing struggles of the U.S. dollar and the fundamental factors with the concerns on refilling natural gas storage by winter and the outage at the Independence Hub,” he said. “Now the dollar is showing a little bit of strength right now, which might cause some of the funds to be a little concerned about holding these raw material commodities.”

With $2-3 gas likely gone forever, locking in reasonably priced natural gas will likely be a challenge. Utilities, power generators and industrial end-users are going to have to pick their spots and move quickly to secure lower-priced natural gas in the increasingly higher-priced and challenging market, according to Val Trinkley, general manager of EnergyUSA, a NiSource company, who will be conducting a strategy workshop at GasMart 2008 in Chicago May 20-22 (see related story; www.gasmart.com).

Tuesday’s sell-off was seen by many as traders taking advantage of recent meteoric gains. Some traders said the time may be ripe for producers looking to lock in favorable prices. “If I had a choice, I would rather be short because prices have had such a nice run,” said a New York broker.

He added that the risk-reward was looking “better and better” to be on the short side, but “in order to take a big position on the short side we need the market to break the trend. Any good trader will recognize it is impossible to catch the top, but you want to see the market break the trend line and have a couple of days down before you jump on board. I am telling all my producer clients to stand aside for now. This is a freight train and let’s not get run over.”

Longer term, analysts see little in the way of immediate resolution to supply difficulties. Increases in production are seen as being offset by lower liquefied natural gas (LNG) imports. “A timely [Independence Hub] recovery in a couple of weeks will be needed to maintain production strength that could exceed 4% on a year-over-year basis during the first half of 2008. But we would reiterate that these output gains will be largely negated by LNG import losses as well as a limited availability of Canadian supply,” said Jim Ritterbusch of Ritterbusch and Associates. Ritterbusch characterizes a narrowing of the supply deficit relative to the last two years as “difficult.”

Normally at this time of year weather is not an issue, but a cooler near-term forecast by AccuWeather.com suggests that storage injections may at least be tempered. In its six- to 10-day forecast AccuWeather.com predicts cooler-than-normal temperatures for a broad section of the country east of a line from Montana to South Texas and west of a line from Maine to southern Alabama. Arizona, portions of Nevada and eastern California are expected to be above normal, and the remainder of the country, including the Eastern Seaboard and Florida, is forecast to be normal.

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