Out of Hibernation, Bears Use Storage to Beat Back the Bulls
The bull trend in natural gas futures suffered what some analysts and brokers believe was a fatal blow Thursday as prices spiraled lower on yet another bearish storage report (156 Bcf withdrawal) by the Energy Information Administration. The prompt contract dropped 39 cents in five minutes following the 10:30 a.m. EST inventory update. By 11 a.m. EST, prices had bottomed out at $5.60, down 62 cents from the market's pre-EIA level. A modest rebound was seen in the afternoon, and the February contract finished the session at $5.834, down 31.6 cents on the day.
According to the EIA, storage stocks decreased by 156 Bcf to 2,258 Bcf during the week ending Jan. 16. Although the drawdown narrowly edged out the 153 Bcf figure released a week earlier, it fell dramatically short of the median expectation in the 185-188 Bcf range. While there were some expectations that the weekly withdrawal could be as small as 150 Bcf, there also were some predictions that it could be as large as 250 Bcf.
Versus historical withdrawals, the number also fell short. A year ago, the market drew a whopping 219 Bcf and the five-year average withdrawal for this time of year is 165 Bcf. Accordingly, the surplus to both the year-ago and five-year averages grew last week. Storage is now 282 Bcf above 2003 levels and 193 Bcf above the five-year average.
Thursday's report was not the first time this winter the storage pull failed to live up to expectations. Following last Thursday's surprisingly small (given the record cold) 153 Bcf withdrawal, the market dumped 54 cents. Armed with the news that only 80 Bcf was pulled from storage over the Christmas week, the market suffered a 41-cent decline in New Year's Eve trading.
The string of bearish storage data in spite of the record cold weather has market-watchers scratching their heads. Historically, analysts and traders have done a pretty good job of estimating storage withdrawals using heating degree day calculations. So why have their formulas failed as of late?
Sources believe the answer may lie in the increased use of storage for reliability purposes by utilities following the demise of the large marketers. Whereas merchant energy traders in the late 1990s and early 2000s would use storage as a profit center, utility buyers are more risk adverse, and therefore, more interested in reliability of supply than making a quick buck by selling their storage gas into a high-priced market.
After several weeks of ignoring the bearish storage message, the market finally seems to have caught on. "As far as Nymex is concerned, winter is over," a broker quipped.
Others agree and point to the 180-degree about-face made by technical indicators over the past couple of weeks. "This market has suffered some pretty serious damage," said George Leide of Rafferty Technical Research. "It would take a move back above $5.85 to begin the process of repairing the charts." More likely, however, is that prices in the February contract will continue lower, Leide continued.
Some buying may spring up at the $5.33 level, but a break lower there would bring the $4.75 target into sellers' sights. Although he said storage was undeniably bearish and certainly contributed to the day's sell-off, Leide noted that fundamental analysis by itself is a flawed way to look at the market.
"Fundamental news has to be quantified, and it may be different to each market participant." Timing is also an issue, he continued. "What might be construed as a bullish piece of information to one trader may have already been priced into the market by other traders." Add to that the many and varied sources of weather data out there and you have a lot of variables that make strict fundamental analysis of the natural gas futures market problematic, he said.