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Weak Cash, Full Storage Send Futures Lower

Despite natural gas inventory levels near all-time record levels, Thursday morning's Energy Information Administration (EIA) report of a minuscule 19 Bcf injection for the week ended Oct. 20 was still small enough to make traders pause. However, cash market weakness helped November natural gas futures -- which expire Friday -- to drop 19.6 cents to close at $7.497.

After trading at $7.650 just prior to the report's 10:30 a.m. EDT release, the prompt month shot higher to put in a high for the day of $7.830 just a few minutes later. However, the knee-jerk reaction wasn't sustained as the November contract ultimately pushed downward to record a low of $7.450 before inching higher to close.

"This move in futures has a lot to do with the cash market and nothing to do with storage, which is full," said Ed Kennedy, a broker with Commercial Brokerage Corp. in Miami. "The cash market is coming off. [Henry Hub] cash was up at $8.000 prior to the opening, then $7.910 [and] last was $7.830 around 11 a.m. EDT, but at that same time it is being offered at $7.740. Cash is coming off, so there is your answer for the sell-off in futures."

As for the next move for futures, the broker said there is really not much to look at regarding price targets. "With puts and calls, we have about 15,000 at the $8.000 strike and down here at $7.500 we have about 7,000, but there is not a lot below that," he said.

Kennedy said the only story currently of interest to futures traders has to do with the weather. "Weather is king," he said. "It's all about whether we get weather. The first two weeks of November are supposed to display below normal temperatures, but lets see what happens during the two weeks that follow that. If we do get below normal temps in November, are utilities going to pull from storage or are they going to go for reliability of supply later this winter. I think they will go for the reliability later on, which should keep the cash market pretty firm."

However, if a warm-up occurs in mid-November, all bets are off, the broker said. "If we do get some warmth in here, this thing is going to come down hard because so will cash," Kennedy added.

Rafferty Technical Research broker Steve Blair agreed that weather is key. "If we do get some warm weather, some downside action will be in the cards, but I just don't know if the warmth is coming." He added that he was a little taken aback by the storage report.

"I was a little surprised that the smallish 19 Bcf injection only created that short reaction higher, but the market may have already had the number so priced in it had nothing to do but ultimately come down," he said. "The close below $7.520, which was resistance and is now support, means technically that we have a little more downside room here to our next support number around $7.260. We could see a little more downside action here. In addition, because Friday brings November's expiration, we could see a joyride of sorts where no one knows where it will end up. It should be interesting, that is for sure."

Blair also highlighted the role of options expiration on Thursday, in particular calls and puts at $7.500. "A lot of $7.500 calls wound up expiring outside the money while a bunch of $7.500 puts expired in the money, so we will have to see how the market responds to that Friday," he said.

Bulls had been counting on a similar outcome to last week's report. Last week's 53 Bcf report for the week ended Oct. 13 was below the five-year average of a 65 Bcf injection and last year's 73 Bcf, and prices took off. The November contract jumped 32.5 cents that Thursday to settle at $7.132.

The real test may come next week. According to a New York floor trader, next week's storage figure may show a draw on inventories.

With storage sitting at 3,461 Bcf as of Oct. 20, stocks were just shy of the all-time record of 3,472 Bcf, which was posted at the end of November 1990. The 19 Bcf injection came in well below last year's 77 Bcf injection and the five-year average build of 49 Bcf.

A Reuters survey of 24 industry players had been calling for an average build of 31 Bcf, while the ICAP storage options auction on Wednesday indicated a 24 Bcf injection. Golden, CO-based Bentek Energy projected a storage injection of 27 Bcf. Bentek's inventory estimates now show eight U.S. storage facilities at or above 100% full and 11 other facilities at 95% to 99% of capacity.

As of Oct. 20, stocks were 333 Bcf higher than the same time last year and 315 Bcf above the five-year average of 3,146 Bcf. Injections were muted around the country due to colder weather or lack of storage space. The East region injected 9 Bcf for the week, while the Producing and West regions contributed 7 Bcf and 3 Bcf, respectively.

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