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Futures Drop 5.6 Cents after Neutral 11 Bcf Storage Draw

With the Midwest and Northeast huddling together for warmth as the coldest weather of the season sets in over the next couple of days, January natural gas futures in lethargic trading Thursday moved within a slim 23-cent range before closing at $7.671, down 5.6 cents on the day. Coming in well within expectations, the Energy Information Administration (EIA) reported Thursday morning that 11 Bcf was removed from underground natural gas storage for the week ended Dec. 1.

Despite surprising no one, January natural gas futures bumped higher following the 10:30 a.m. EST report. The contract, which was trading at $7.650 just prior to the storage report's release, immediately knee-jerked higher to trade at $7.730 before returning lower a few minutes later. After moving to a high of $7.810 just after 11 a.m., the contract moved lower for good.

"I think the [storage] report really had something for everyone," said Tom Saal of Commercial Brokerage Corp. in Miami. "The bears can point to the 10 Bcf injection in the East region while the bulls can rally behind the 21 Bcf withdrawal in the West region. There really is information for both sides of the market, it's just a matter of how they spin it.

"We are pushing a tad higher here in futures, but we are not setting any records," the broker added. "From what I have been hearing from the trading floor, it is mostly locals getting in and out of their positions. We definitely held the low end of the range down around the $7.60 area as buyers seem to be showing up at that level, so maybe we will gravitate to the upside here." Indeed, the prompt-month put in a low of $7.58 Thursday afternoon, but a wave of buying followed.

Focusing on the weather picture, Saal said the market has been following the forecasts pretty well to date. "The forecasts are now calling for above-normal temperatures next week, so I think that is why the market is a little skittish here about doing anything," he said. "Obviously it has come off, but it appears to be stabilizing in this $7.60 area. We'll take our next cue when we actually see what kind of conditions show up next week."

While calls for a warm-up next week are prevalent, the significant cold burst late this week should push thermostats higher, if only for a few days. "A polar bear would feel right at home anywhere across the Midwest and Northeast Thursday night and Friday," said AccuWeather meteorologist John Kocet. "The animal would be particularly fond of the Great Lakes snow belts where snow is piling up by more than an inch per hour in some locations. Friday, the entire Northeast will be exposed to the coldest weather so far this season. Teens and twenties will be widespread Friday, and even along the I-95 Corridor the temperature will not climb much higher than freezing. Factor in the wind, and it will feel even worse."

Students of market movement believe that the September-November price rise constitutes a preseason rally often observed as natural gas prices advance, reflecting buyers' uncertainty over the upcoming winter. "The nature of the $4.050 low (October futures Sept. 27) to $9.050 (January futures Nov. 30) and the extent of the drop from $9.050 both strongly suggest that $4.050 to $9.050 was this year's preseason rally," said Walter Zimmerman of United Energy. This is important, for if Zimmerman's assessment is correct, prices may continue still lower into late January and early February. "Peg the $5.120 to $4.980 area a realistic downside target for this presumed seasonal decline as both the 0.7862 retracement and an average seasonal retreat."

However, don't sell just yet. Zimmerman went on to say that in the framework of seasonal and cycle analysis, Wednesday's modest advance of 4.2 cents to $7.727 looks like "$7.500 may have finished the leg down from $9.050 and that the bear market correction of this decline has just begun. This case hinges on a Thursday rally," he admitted, one that ended up failing to materialize.

The storage withdrawal came in right in the middle of expectations. A Reuters survey of 20 estimates expected 15 Bcf to be removed from storage for the week, while the ICAP storage options auction on Wednesday showed a consensus 9 Bcf withdrawal. The actual 11 Bcf withdrawal paled in comparison to last year's 58 Bcf withdrawal and a five-year average pull of 63 Bcf.

As of Dec. 1, working gas in storage stood at 3,406 Bcf, according to EIA estimates. Stocks were 232 Bcf higher than at the same time last year and 282 Bcf above the five-year average of 3,124 Bcf. While the East region injected 10 Bcf and the West region withdrew 21 Bcf, the producing region remained unchanged.

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