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Withdrawal of 88 Bcf Increases Storage Surplus; Futures Drop

The Energy Information Administration's (EIA) report Thursday of an 88 Bcf storage withdrawal did nothing to dissuade the recent downward momentum of March natural gas futures. After notching a low of $8.170 late in the session, the prompt month settled at $8.347, down 37.6 cents from Wednesday's close.

While the 88 Bcf withdrawal for the week ended Jan. 27 was well within industry estimates, it paled in comparison to last year's 193 Bcf withdrawal and the five-year average withdrawal of 172 Bcf.

After trading lower in the overnight Access session, the prompt month began Thursday's regular session at $8.430. March natural gas managed a high for the day of $8.500 in morning trade before falling lower for the remainder of the session.

"We saw this number coming but it is still bearish anyway," said Tim Evans, an analyst with IFR Energy Services. "The 88 Bcf report was not a shock, but it does show that we have an even larger storage surplus to skate through the mid-February cold snap that everyone is focused on."

Breaking down the storage situation, Evans noted that this report added 84 Bcf to the five-year average surplus. "It looks like we will have another bearish report for this week, but to put everything in perspective let's look ahead two weeks to the start of the cold period. The five-year average withdrawal for the week ended Feb. 10 is 144 Bcf. If you add the 84 Bcf variance with the five-year average, we will need to have a weekly withdrawal of 228 Bcf just to make up for one week of warmth. It's not impossible, but this cold snap has a lot of work to do if it's going to really firm this market up."

Evans pointed out that trading this week has been treacherous at best with the 88.2-cent increase Monday and the 59.3-cent drop Wednesday. "I'm just trying to stay on the right side of this thing," he said. "I basically feel good about having taken a piece out of the rally on the way up and being prepared to sell it again on the way down. Anybody who made money on both Monday and Wednesday is a decent trader because it was not easy to do with these swings."

Acknowledging that a cold front in February might be too little too late, Evans said it still could have an impact. "Frankly, the coming cold front may succeed in providing some support to the physical market and the futures once it arrives, but that could be at a lower price level," he said. "The cold could provide a $2 bounce, but if that is from $7 to $9, then it is still too soon to buy it. Wednesday's pullback by futures emphatically showed us that the bounce will not be back up to $15.780," which was the prompt-high in December.

Evans said the $9.82 turning point from Wednesday seemed to have been an arbitrary price level. "I don't know who had $9.82 on their lottery ticket as being the place to offer 5,000 contracts or whatever it was that capped it, but it certainly did get capped Wednesday," he said.

Wednesday's trading showed high drama, and how perilous natural gas futures trading can be. Early market strength based on favorable weather reports boosted (mainly local traders') enthusiasm and the March futures were bid up to as high as $9.820, but "what happened was that buying dried up. With the storage number coming out [Thursday], the market fell back due to weak length holding it up," a New York floor trader observed.

"The momentum changed ever so slightly to more bearish, yet these [locals] were all patting themselves on the back saying, 'We're right; we're long the market,' and then they were looking over their shoulder expecting more buying to emerge and push prices even higher. It was like they were expecting the [buying] cavalry to come charging over the hill and save [their] day, but it didn't. The locals all had to scramble to sell when they realized there was no follow through buying." March futures fell 59.3 cents Wednesday to settle at $8.723.

The floor trader said that the market was nothing more than a "house of cards" and "once the market fell back through the $9.46 to the $9.48 area, which was a breakout point to the upside, the market collapsed. There was nothing to hold it up. Overall, we are running out of winter, and low temperatures keep moving higher and less gas is used. I look for the market to trade sideways in the short term."

In the near term, weather should be supportive. The National Weather Service's six-to-10-day forecast shows below-normal temperatures south and east of a line from central Wisconsin through East Texas, with parts of the Southeast experiencing well below-normal temperatures. A large portion of the central and western states, including California, the Pacific Northwest and northern Montana are forecast to be above normal.

Most industry estimates for the storage report had been centered in the high 70s to high 80s. A Reuters survey of 21 industry players was calling for an average withdrawal of 87 Bcf, while Golden, CO-based Bentek Energy said its storage sample indicated that 84 Bcf was removed for the week. Wednesday afternoon's ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, zeroed in on an 85.9 Bcf withdrawal for the week.

As of Jan. 27, working gas in storage stood at 2,406 Bcf, according to EIA estimates. Stocks are 296 Bcf higher than last year at this time and 529 Bcf above the five-year average of 1,877 Bcf. The East Region led the withdrawal charge by pulling 55 Bcf, while the Producing and West regions removed 17 Bcf and 16 Bcf, respectively.

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