June natural gas futures crashed hard to finish the week, which casts doubt on the impetus behind the rally of the last two weeks. Some traders said the swift retreat shows that the rally was less driven by fundamentals and more fund-driven, which calls into question the reports during the week of the sizeable open interest position held by the United States Natural Gas Fund (UNG). Front-month natural gas closed at $4.098 on Friday, down 19.4 cents from Thursday and 21.3 cents lower than the previous week’s finish.

While some analysts were claiming that the exchange-traded fund (ETF) might be cornering the market because it allegedly is holding title to as much as 80% of the June contract’s open interest on the New York Mercantile Exchange, other analysts and traders were less convinced that the story, and/or the percentage, could be true (see Daily GPI, May 15).

“I find it hard to believe that UNG would be holding 80% of the open interest in the front month,” said Steve Blair, a broker with Rafferty Technical Research in New York. “That would be pretty incredible. The UNG fund is like the USO [United States Oil Fund] on the crude side, which created the whole stink when crude went up last year. People said the fund’s sizeable position was behind the run-up.

“I wouldn’t rule out that the UNG fund had something to do with the recent rally in natural gas futures because the bullish fundamentals are not there to support the move. I’ve been saying that this price hike has to be the result of some fund money coming back into commodities. The equities have been up, so people are taking some of those gains and moving into commodities.”

Blair identified the $4.380 price level as an important pivot point. “We got up to $4.575, but it did not hold. Now we’ve broken back below $4.380, so I think we’re headed lower. The major bear trend that we just broke out of had a pretty good trading channel, so we’re probably headed there for now. The top of that channel is around the $3.980 to $4.020 level, so if we close below there we’re certainly back in that channel. If that happens, it proves that this upward move was fund-driven and not fueled by anything of a fundamental nature.”

Thursday’s report of a 95 Bcf injection into gas storage was considered moderately bullish, and it was sufficient to rescue June futures from an opening 20-cent deficit as they closed 4.1 cents lower that day at $4.292. Longer term, however, analysts question whether it is supportive enough to maintain the recent advance that saw prices rise from the low $3 area in late April.

“This week’s report was supportive, but it is unlikely to cast any kind of ‘shadow’ over prices. And if prices are trying to establish the upper parameter of a trading range, which we believe they must be, we would expect trading to start to get choppy,” said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm. “We may see new highs on this run, but we still believe that the purpose of this advance, the end-game as it were, is to establish an upper boundary. Even if it turns out to be $2 higher, that is the point, we feel.”

Beutel sees fundamentals constraining any significant advance. “The fundamentals are still basically poor, bordering on dreadful. While we believe that the downside may be limited and that $3.155 represented a level at which the bearish fundamentals had been discounted, the upside also seems limited by the lack of industrial demand and heavy inventories,” he said.

Short-term traders see hefty fund trading on both sides of the market. A New York floor trader noted that large short positions held by funds had been switched to the long side, but “some of the shorts are in the $5 handle, so they are content where they are and are looking to sell if prices get back to $4.500 to $4.700.

“There are different funds with different objectives and different time frames on both sides of the market,” he said.

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