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Futures Break Six-Day Upward Streak, Await EIA Storage Methodology Revision

After giving the appearance in Wednesday morning trading that natural gas futures were headed higher for a seventh consecutive day, the September contract ended up pulling off of its highs and exploring lower, before settling near unchanged.

The contract opened at its regular session high of $8.590, traveled to a low of $8.275 in the afternoon and settled at $8.351, down 2.7 cents for the day. While some attributed movement to weather forecasts and September crude's $1.03 drop to $60.86/bbl, others said the back and forth trading resembled to a degree the uncertainty swirling around the Energy Information Administration's (EIA) storage reporting methodology change (see related story).

Late last month (see Daily GPI, July 29), the EIA reported that it was revising the estimation system used to produce the storage estimates published in the Weekly Natural Gas Storage Report. The new system expands the sample of companies used for estimation from 56 to 63 and revises the approach used to estimate the total volume of working gas in storage nationwide from the weekly sample data.

The effective date for the new system is Thursday, when working gas estimates as of July 29 will be released. At the same time, the EIA also will release revised storage estimates based on the new methodology for all weeks from June 17 to July 22. The planned revisions had industry players wondering whether overall stocks will be unchanged or revised lower or higher and by how much.

Commercial Brokerage Corp.'s Tom Saal said he wouldn't be so quick to call the recent upward move dead yet. "I'd like to say that we reached the end of the upswing, but I am really cautious here because the EIA's new methodology goes into effect Thursday. As of right now, the effect on storage levels is unknown."

ICAP Energy's Brad Flores said breaking the chain of six consecutive days of higher prices could mark a reversal. "I think we saw some profit-taking Wednesday," he said. "There really was no real news that held any real bearish content. We have had six days where futures have gone straight up, so there had to be some selling sooner or later. Having said that, closing lower on the day after opening at new highs is a key reversal signal. We will see if technical selling follows through a little bit on Thursday."

Flores warned that bears shouldn't be celebrating yet. "I think if September could have closed below the pivot in the $8.20s somewhere, the move would have carried a lot more weight," he said. "As it is, it is still not a slam dunk that this is the end of the move up. It is still hot. There is still uncertainty in Saudi Arabia, and there is still plenty of bullish activity out there. It should be very interesting to see how this week plays out.

"At least people who are still short, or people who are bearish, can walk away [on Wednesday] and maybe take something away from the futures market for the first time in a number of days. It really has been a nasty run," Flores said. "If they can put a nice sell in tomorrow, it will give this thing some room to pull back to around $7.50, so you probably have some bears targeting that."

Keying in on the storage report for the week ended July 29, Citigroup's Kyle Cooper said, "Our uncertainty this week is quite high as the new EIA weekly report methodology is introduced. In the short run, the hot weather is impacting storage injections, but the beginning of the heating season is a long way off," he added. Cooper estimates that the report will show an injection between 40 and 50 Bcf.

A Reuters survey of 21 industry players expects natural gas stocks to rise by an average of 48 Bcf for the week ended July 29. The ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 43 Bcf injection.

The number revealed Thursday will be compared with last year's 81 Bcf injection and the five-year average build of 66 Bcf.

In the short term, the weather is expected to continue to be hot in the nation's midsection. According to AccuWeather, the Southern Plains saw temperatures soaring well into the 90s from Amarillo, TX, to Kansas City, MO, on Wednesday. On Thursday, the heat wave will be snapped by a much cooler air mass coming down from the North. In some locations, the temperature will be as much as 20 degrees lower on Thursday, especially where it remains cloudy. Showers will accompany the change to cooler weather with the wettest weather occurring from central Kansas and central Oklahoma westward.

The Weather Channel predicts that the high of 93 for Chicago Wednesday will subside to 85 Thursday and 82 Friday.

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