May natural gas futures retreated Monday as traders looked to near-term weather forecasts and related weakness for price drivers. At the close the May contract had given up 6.2 cents to $4.008 and June retreated 5.8 cents to $4.111. May crude oil was also weak falling 58 cents to $84.34/bbl.

In the near term moderating weather appears poised to thwart any sustained price advance. “A continued weak physical trade that is resulting from mild temperature patterns is providing some downward pull on the nearby futures and enabling the market to virtually ignore the positive economic vibes that continue to emanate from the Dow Jones Industrial Average that has now pushed to above the 11,000 mark,” said Jim Ritterbusch of Ritterbusch and Associates. He added that any “sustained price increases” will be difficult as long as the drilling rig count continues to increase.

Oilfield services firm Baker Hughes reported Friday that for the week ended April 9 the number of rigs drilling for gas increased by 10 to 959. This is up sharply from a year ago when 790 rigs were actively drilling for gas but still down from the peak of 1,606 rigs reached in July 2008 when spot futures peaked near $14.

Analysts see different market strategies for traders and risk managers. “On a trading basis, we still see no compelling fundamental reason to cover our short positions. But as a trader we have been monitoring the market closely for a reason to get long the gas market,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. He noted that last September when the market was trading well under $3, there were numerous substantial short-covering rallies. “For speculators, we will try to purchase September $4.50 calls at 38-45 cents. Hedgers, we will hold current positions,” he said in a morning note to clients.

DeVooght’s current positions consist for physical market longs of the balance of a 12-month $5-8 collar, which was initiated in August at a cost of 35 cents, and a 12-month $5.50 put and short a 12-month $7.50 call begun in December. End-users are counseled to stand aside for now.

In spite of a stout move to the short side of the market by funds and managed accounts, spot futures gained for the five trading days ended April 6. According to the Commitments of Traders Report of the Commodity Futures Trading Commission, traders concerned with the directional focus of natural gas futures and options and not attempting to hedge a physical position added heavily to their short holdings. At the IntercontinentalExchange long holdings (2,500 MMBtu) increased by 4,190 contracts to 539,520 and shorts rose 4,788 to 46,505 contracts. At the New York Mercantile Exchange long futures and options fell 1,696 contracts to 159,396 and short holdings surged by 12,406 contracts to 236,161. After adjustment for contract size total longs at both exchanges decreased 649 contracts and shorts rose by 13,603. For the five trading days ended April 6, May futures rose 12.3 cents to $4.096.

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