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Large 171 Bcf Withdrawal Fails to Create Lasting Bounce in Futures

Coming in well above almost all industry expectations, the Energy Information Administration (EIA) reported Thursday morning that a whopping 171 Bcf of natural gas was withdrawn from underground storage for the week ended Feb. 24. The report immediately sparked the April natural gas futures contract to a high of $6.920. However, once the big picture was absorbed, lower prices followed. Prompt-month natural gas ended up settling at $6.760, up 2.7 cents from Wednesday.

The pull from storage eclipsed every other weekly withdrawal this season except for the report covering the week ended Dec. 9, 2005, during which 202 Bcf was removed from underground stores. The immediate knee-jerk reaction by futures traders following the report was bullish, as April natural gas jumped from its pre-report trading level of $6.780 to the day's high of $6.920 four minutes after the report's 10:30 a.m. EST release.

However, traders seemed to realize that despite the report's size, the number did little to reduce the significant storage surplus compared historical levels. In addition, much of the remaining surplus is likely to remain intact with only one month left in the heating season. In the afternoon, the prompt-month went on to record a low of $6.540 before climbing higher at the close.

"The storage report from here on out is meaningless," said Ed Kennedy of Commercial Brokerage Corp. in Miami. "How much winter do you think we have left? There is plenty of gas in storage to handle any cold left."

Kennedy said he didn't lend much credit to the theory that the withdrawal was larger due to returning industrial demand because of lower gas prices. "Industrial demand is tiny," he said. "I think people make way too much of it. The thing you have to remember is that the fuel the chemical industry switches to is coal. Now when you switch to coal you have to do a long-term contract. The natural gas price isn't necessarily going to impact that, the duration of the contract will."

As for some of the other large gas users, Kennedy said the big ones are the utilities and the fertilizer industry and they are "now in" at current natural gas prices.

Looking at weather, the broker said the winter for all intents and purposes is over and the focus is now on the summer. "The long-range forecasts for the injection period are now center stage," he said. "Just last week, a number of senior meteorologists over at AccuWeather.com said they are calling for 'dustbowl' conditions this summer. Going back to 1939 and looking at the month of July, dustbowl conditions in the central and southern Plains resulted in temperatures that never dipped below 100 degrees. It is things like this that could start impacting the market as we go through this upcoming shoulder period.

"As for now, the bulls have nothing to build a case on and the bears have already enjoyed a huge drop in prices," Kennedy continued. He noted that the April-October strip, also known as the injection strip, currently sits at $7.34. "If that strip gets down around $7, every utility in the country is going to come in and take protection for the summer and hurricane season. They are not going to be underhedged again with a forecast for an active hurricane season.

Natural gas storage supplies as of Feb. 24 stood at 1,972 Bcf, a record over the past 12 years. According to DOE figures that go as far back as 1994, the only year that comes close to the current level is 2002, when 1,962 Bcf remained in storage on Feb. 22. As for the impact of the surplus on prices, history has shown that prices may be able to advance once the market fully digests the prospects of a large season-ending inventory. Spot futures for 2002 posted a low on Jan. 28 at $1.850 before staging an advance to $3.875 by May 14.

The 171 Bcf pull did come in above the estimates of industry veterans. A Reuters survey of 22 industry players was looking for an average withdrawal of 154 Bcf, while Wednesday afternoon's ICAP-Nymex storage options auction had been calling for a 160 Bcf withdrawal. Golden, CO-based Bentek Energy projected a storage withdrawal of 151 Bcf.

The 171 Bcf withdrawal dwarfed last year's 104 Bcf pull and the five-year average withdrawal for the week of 118 Bcf. Despite the significant withdrawal, current stocks are still 344 Bcf higher than the same time last year and 641 Bcf above the five-year average of 1,331 Bcf.

The East region led the withdrawal charge last week by removing 96 Bcf from underground stores, while the Producing and West regions pulled 47 Bcf and 28 Bcf, respectively.

From a fundamental standpoint, this week's report looks bullish when compared to historical norms, but some market technicians aren't convinced. According to Walter Zimmerman, vice president of United Energy, the relatively narrow 19-cent trading range exhibited by the April contract Wednesday is "classic bear market rest-stop action. The minimum requirement of the bulls to break the bearish pattern of a continuing five-wave decline is a decisive close above the $7.140 level." He added if that does not happen, prices are likely to decline to $6.200 or lower.

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