Natural gas futures slid lower in uninspired trading Monday and traders have begun to question the markets ability to test the upper end of its trading range. June futures fell 1.8 cents to $4.017 and July shed 3.1 cents to $4.075. July crude oil added 17 cents but the remaining contract months posted losses.

“Prices failed to trade above recent highs, and now the market enjoys [only] cautious support,” said a New York floor trader. He added that after last week’s decline he expected more of a rally Monday, and “now we have cautious support at $4 and longer term support at $3.81. It failed higher and for the moment any breakout [higher] is in doubt. No one wants to be short the market either. Buyers and sellers have to be wary.

“Probably some traders got spanked when prices failed to break higher last week, but there hasn’t been any followthrough to the down side either.” He added that he wasn’t seeing substantial trade and commercial orders to buy the market at lower prices, but “the market hasn’t failed to the point where the kind of buying would be realized. We think they are there, and there may be traders trying to cautiously enter the market on the long side without fracturing it.”

Traders are looking for lower prices as an opportunity to consolidate gains from earlier sales.

“While we look for some Tuesday consolidation tomorrow, some fresh two-three week lows should not be ruled out and such a development would provide a further bearish signal. We are still suggesting a bearish stance as we await further declines in the July futures to the $4 level or lower as an opportunity to accept profits,” said Jim Ritterbusch of Ritterbusch and Associates. Assuming prices weaken, Ritterbusch is prepared to cover and reverse to the long side if necessary. Thursday’s weekly storage numbers are likely to indicate a figure below average injections of about 95 Bcf and the year-ago build of 104 Bcf.

Assuming the downside target is achieved, Ritterbusch said he will look to reverse and begin probing the long side at sub-$4 levels per July futures.

June futures lost 27.7 cents last week at a time when equity and oil markets were spiraling lower on fear of Europe’s inability to come to grips with its debt crisis and concerns that it may dampen, if not reverse, any recovery from the global recession. Analysts almost see natural gas with its North American focus as a safe haven.

“Natural gas might be deriving some benefit from the stronger U.S. dollar and the shift from the trade ‘sell the U.S. and buy the rest of the world’ to maybe ‘the U.S. is not a bad place to be,'” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. He conceded that market fundamentals “still look terrible for the gas market, but a lot of the bearish news is probably reflected in current prices.”

DeVooght continues to hold current positions. Traders are advised to hold long October $4.50 calls purchased for 38-45 cents and end-users should stand aside. Producers and those with exposure to lower prices should continue to hold the remainder of a 12-month $5-8 collar begun last August for 35 cents as well as the balance of a 12-month $5.50 put held against the sale of a $7.50 call begun in December.

According to government figures, money managers and those concerned with the directional movement of prices who are not offsetting a cash or physical position covered short positions and made nominal purchases. For the week ended May 18, managed money had little interest in continuing to pursue the short side of the market and on balance reduced market exposure.

In the Commodity Futures Trading Commission’s weekly natural gas Commitments of Traders report, IntercontinentalExchange long futures and options positions (2,500 MMBtu) rose by 7,098 to 354,557 and shorts rose by 3,386 to 50,408. At the New York Mercantile Exchange long futures and options (10,000 MMBtu) increased 2,724 to 155,246 and shorts fell by 15,513 to 212,460 contracts. When adjusted for contract size, long futures and options on both exchanges rose by 4,498, but shorts contracted by 14,667. For the five trading days ended May 18, June futures rose 21.1 cents to $4.342.

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