Short-Covering Rally Fails to Sway Bearish Sentiment
After dropping 5% Thursday in reaction to the overwhelmingly bearish storage news, the natural gas futures market rebounded Friday as traders covered shorts ahead of the weekend. Adding to the bullish euphoria over the expected chill over the weekend, traders were reticent to hold short positions for fear that the market would rally if another round of chilly forecasts were issued Monday morning.
The February contract received the biggest buying boost, gaining 22.5 cents to $6.059. At 51,920, estimated volume was light for the session and served to cast doubt on the price advance.
The relatively low level of trading activity Friday gave market-watchers and traders the opportunity to further pontificate on the surprisingly small storage figure released last Thursday. 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 average levels grew last week. Storage is now 282 Bcf above 2003 levels and 193 Bcf above the five-year average.
"The weak withdrawal data of the past several weeks may imply that as much as 3 Bcf/d of demand has disappeared as a result of the recent $1.00-1.25 rise in price," wrote Lehman Brothers analyst Thomas Driscoll. Looking ahead, he believes this apparent disequilibrium will result in prices dropping back by as much as $1.25 over the next several months (below January bidweek levels at roughly $6.00). At the same time, Driscoll is raising his end-of-the-season storage estimate by 100 Bcf to 1,225 Bcf. "This compares to a typical [April 1] target of 1,000 Bcf," he said.
"It appears that prices above $6.00, or somewhere very close to that level, do indeed generate an enormous amount of fuel switching, conservation actions or outright demand destruction as to deem them completely unsustainable without an incredible confluence of events," chipped in Citigroup analyst Kyle Cooper.
Another factor that may have contributed to the low storage draw is that power imports from Canada may have displacing natural gas demand. "Normally twice a year Canada will open up flows when they think water levels are acceptable and export additional power south into the New York and NEPOOL markets," said a Massachusetts Hub trader. He said that typically when power prices cleared $100 in US markets, that would attract Canadian power. "It makes perfect sense. Hydro power typically costs about $11 and the recent sky-high prices in NEPOOL were definitely attractive." Spot gas prices in the Northeast two weeks ago spiked as high as $76/MMBTU.
Looking ahead, the market early this week will be conflicted by the same forces that have competed from most of January -- bullish weather and bearish storage. With fresh storage data still a few days out, the market may take its first price cues from updated weather outlooks to be issued early Monday. As of press time Friday, there existed the potential for a significant snowfall event Sunday night and Monday for areas of the Mid-Atlantic and New York state. Should traders arriving at the exchange Monday morning have to slog through snow, there could be a bit of psychological buying at the open.
At the same time, the technical "psychology" of the market turned decisively in favor of the bears last week. Even the short-covering rally on Friday failed to muster the gusto to push through downtrend resistance in the $6.15-25 area. On the downside, support is seen at last week's $5.60 low. A break there could lead to a move quickly to the $5.45-50 area, chartists agree.