After flirting with key support at $5.00 throughout much of thesession, natural gas futures broke lower late yesterday after aprice-constructive storage withdrawal report failed to attract therequisite buying activity. The prompt April contract finished 9.5cents lower at $4.911. However, the real story was the out-months,many of which suffered double-digit setbacks. The 12-month stripclosed 10.3 cents lower at $5.091.

According to the American Gas Association, 75 Bcf of working gaswas pulled from underground storage facilities last week, leavingstocks 22% full at 711 Bcf. Although the 75 Bcf in withdrawals waswell within the 60-100 Bcf range of market expectations, it wasdeemed bullish as it exceeded last year’s 31 Bcf draw and lastweek’s 73 Bcf net takeaway. Prices reacted accordingly at first,spiraling up to $5.05 minutes after the 2:00 p.m. (EST) release.However, the rally was short-lived, and April tumbled 15 centslower during the next 60 minutes.

For Tim Evans, senior energy analyst at New York-based IFRPegasus, the move lower late yesterday was discouraging, but nottotally unexpected considering the market’s recent track record ofshrugging off bullish news. “The year-on-year storage deficit – nowat 415 Bcf – is at its largest level since Feb. 2. And this trendof falling further behind on storage normally helps to produce anuptrend in price, but it has not done so over the last month.”

A possible explanation for this anomaly, Evans explains, has todo with the market’s focus. While the low storage level relative tolast year will ultimately impact the summer refill season and nextwinter’s withdrawal season, the market’s focus right now is on theshort-term. “It is so late in the heating season that nobody reallycares about the deficit. At this withdrawal rate, we will bottomout at around 600 Bcf and that is fine if you are a consumer ofnatural gas in the short run…. Where the 600 Bcf is supportive iswhen you look forward. How are we going to get from 600 Bcf to3,000 Bcf?”

For Evans, the answer to that question is that the market willnot be able to get back to the magic 3,000 Bcf full level headinginto next winter, and that, coupled with bullish demand outlooks,paints a decidedly price-constructive picture looking ahead.Accordingly, the question that he believes needs to be answered isnot if, but when, this bullishness will take hold on prices. “Westill see this market as working on a rounded bottom, but the newlows this week demonstrate it may still be in the declining slopeof the saucer.”

That said, he recommends his clients look to a bull call spreadto take advantage of this potential upside. By buying a $5.25 Julycall and simultaneously selling a July $5.75 call, one caneffectively lock in a 50-cent profit, less the net option premium,as long as the July futures contract moves above $5.75. As ofyesterday’s close a July $5.25 call was 41 cents and a July $5.75call was 26 cents, netting a 15-cent option premium.

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