Following the extended run-up last week, petroleum futures dropped significantly Monday, which helped natural gas futures come off in tandem. May natural gas futures put in a low of $7.520 on the day before closing at $7.558, down 42.3 cents from last Friday’s close. The May contract expires Wednesday.

Natural gas traders continue to grapple with the on-again, off-again relationship between natural gas and anxiety-driven crude oil and petroleum product markets. Following a stretch of new all-time highs last week, culminating in a $75.35/bbl high on Friday, June crude on Monday put in a low on the day of $72.95/bbl before closing at $73.33/bbl, down $1.84 from last Friday’s close.

May heating oil and May unleaded gasoline also dropped significantly Monday, with heating oil settling 4.45 cents lower at $2.0317/gallon and gasoline closing 6.45 cents lower at $2.1739/gallon.

“I think to a certain degree we followed crude higher and now we followed it lower,” said Steve Blair, a broker with Rafferty Technical Research in New York. “To a large degree, the crude and natural gas markets have been separate, but when you get the petroleum complex making new all-time highs, it really doesn’t surprise me that natural gas would follow along. Nor does it surprise me that natural gas would break down with crude when crude fell off its new all-time high.

“I think the upward movement by natural gas above $7.75 was a huge technical move. With Monday’s action, that $7.75 number now becomes our resistance. I am really not surprised that we are back down here because the market was very comfortable at these price levels for a number of weeks.”

Blair said the real question now is whether the up move for natural gas is over or whether it is a temporary spot for profit-taking. “I think there will probably be a little more downside action, but I don’t think it will go too much further down,” he said. “It’s also possible that the market won’t make another big move until Thursday’s storage report, which could show a smallish injection. With the significant early heat in a number of U.S. regions last week, fear of a smallish storage build could have played into the up-move in natural gas last week.”

Commenting on last week’s run-up, Michael Rose, director of the trading desk with Angus Jackson Inc. in Fort Lauderdale, FL, said “This upturn in [natural] gas prices is fluff, brought to you courtesy of the crude and unleaded markets. We don’t have the same fundamental problems as they do. Gas should sell off some more this week.”

Fluff or not, oil futures settled above $70 every day last week. Traders and analysts surveyed by Bloomberg predicted oil prices may increase this week. Natural gas survey respondents were split on the effect oil will have on prices in the coming week.

The Bloomberg survey showed seven of 14 traders and analysts thought natural gas prices will drop, according to the April 21 poll. Five said natural gas will gain and two predicted little change. The gain of 84.6 cents in May futures for the week ended April 21 surprised 57% of survey analysts a week ago who predicted prices would fall. The Bloomberg survey has correctly predicted the direction of prices in two of the past four weeks, and the survey has called for declining prices for the past seven weeks.

Prior to Monday’s session, Tom Saal, in his work with Market Profile analysis, expected the market to test “value areas” at lower prices and suggested that natural gas buyers be ready to act when the market dips. He identified three value areas in the May contract at $7.950 to $7.868, $7.300 to $7.450 and $7.128 to $6.913.

On Friday, the Commodity Futures Trading Commission reported that noncommercials had reduced their expansive net short natural gas (futures only) holdings. As of April 18, noncommercials held 28,966 contracts net short, a decrease from the 33,214 held a week earlier.

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