May natural gas futures were unable to sustain Friday’s 13-cent advance and stumbled badly as weaker crude oil and equity markets set a negative tone to the day’s trading. Analysts see no reconciliation between plump production and recession-diminished demand for another two quarters and suggest things could get really grim if next winter is mild.

At the close May natural gas dropped 18.9 cents to $3.540 and June fell 19.5 cents to $3.667. May crude oil fell $4.45 to $45.88, and the Dow Jones Industrial Average shed 289 points to 7,841.

“After Friday’s little pick-me up I thought we would come in and see prices a little higher, but everything was getting hammered, and with crude trading down over $4, I figured that the market would just drift lower throughout the day,” said a New York floor trader. “I think we’ll hold in this $3.450 to $3.500 area in May and maybe get a little price spike later in the week back up to $3.750 or $3.800.” He said that part of that forecast was based on crude oil at least holding the $45 area.

Long term analysts don’t see any kind of “pick-me up.” “My hunch is that you are looking for another couple of quarters of low prices,” said Bill O’Grady, principal with Confluence Investment Management in St. Louis.

He added that a lot of drilling activity will drop off, “and eventually that will catch up. The best, or worse outcome depending on which side of the market you are on is if there is a warm winter, which would pretty much wipe everybody out. You would get to a $2 or $2.500 handle which isn’t likely, but you could.

“One thing that disturbs me is that there is a tendency to sit around and see which company is going to be the one that gets out,” O’Grady said. “Every company we talk to says ‘It’s really tough out there, and we expect our competitors to get out, but we’ll stay’. Somehow when somebody blinks it encourages others to hang on.”

Others, such as Mike DeVooght of DEVO Capital Management, a Colorado trading and risk management firm, are already cautiously probing the long side of the market.

“At this time, we are trading, not investing in the gas market,” he said in a morning note to clients. DeVooght suggests that trading accounts hold a long October futures position at $4.500 to $4.650 and end-users hold a May-October strip at $4.300 or better for 10% to 20% of their requirements. Producers should stand aside, he said.

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