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Bulls Can't Hold Early Gains; Futures Close Lower

Falling into a rather well worn pattern, June natural gas futures Thursday expanded the upside of the recent move by a few pennies before crashing back down to earth. The prompt-month contract notched a $11.428 high in the minutes that immediately followed the natural gas storage report's release before retreating to close at $11.263, down 6.4 cents from Wednesday.

While the 65 Bcf injection for the week ended May 2 fell well within industry estimates, the fact that the number was smaller than historical comparisons appeared to be all the bulls needed to once again exert upward price pressure on natural gas futures. Just prior to the 10:30 a.m. EDT report for inventories as of May 2 from the Energy Information Administration (EIA), June natural gas futures were trading at $11.278. In the minutes that immediately followed, the prompt-month contract jumped to trade at $11.428, which is a new high for the up move. However, the bullish momentum could not be sustained as a wave of selling rushed in.

"The 65 Bcf net injection was incrementally higher than the expectation but could still be considered neutral," said Tim Evans, an energy analyst for Citi Futures Perspective. "This does still tend to confirm the weakening in the supply/demand balance in the market indicated by the prior week's data. The report adds 8 Bcf to the year-on-five-year average storage deficit, now at 11 Bcf."

While some market watchers are still very much concerned about the industry's ability to refill storage this year in time for winter, one analysis firm doesn't see a problem. "Although we remain skeptical of the high levels of U.S. domestic production as published by the DOE [Department of Energy], the overall growth trend seems stronger than we had anticipated," a team of Goldman Sachs analysts said in a research note this week. "We are therefore raising our Mar. '08-Dec. '08 US natural gas production outlook by 300 MMcf/d.

"Our end-of-October inventory forecast is now 3,490 Bcf, up from 3,460 Bcf previously. This forecast assumes Nymex natural gas prices move high enough to attract more LNG imports into the U.S. as well as to incentivize some fuel switching away from natural gas and towards residual fuel oil."

Going into the storage report, most industry injection expectations were in the 60-70 Bcf area. A Reuters survey of 21 industry players created a range of injection estimates from 49 Bcf to 80 Bcf with an average build expectation of 64 Bcf. Golden, CO-based Bentek Energy said its flow model indicated an injection of 70 Bcf. The actual injection was just smaller than the five-year average build of 73 Bcf and much smaller than last year's 94 Bcf addition.

As of May 2, working gas in storage stood at 1,436 Bcf, according to EIA estimates. Stocks are 284 Bcf less than last year at this time. The East region injected 38 Bcf for the week while the Producing and West regions added 18 Bcf and 9 Bcf, respectively.

Comparing the report to the previous week's 86 Bcf injection, Lehman Brothers analyst Daniel Guertin, said "The decline in net U.S. storage injections last week was a result of cooler-than-normal weather across the vast majority of the country, which led to higher-than-usual residential/commercial natural gas demand. As measured by population-weighted heating degree days, the week-ending May 3, 2008 was 20% cooler than normal, and the HDD count of 67 was double the count for the same week in 2007. Therefore, the year-on-year deficit increased during the reference week after decreasing somewhat in April."

In a research note Thursday, Guertin noted that this week's weather will likely lead to a larger injection next week, but that a triple-digit injection likely won't be seen during the month of May. "Temperatures this week have turned much warmer across the eastern U.S., with highs returning to the 70's and lower 80's along the East Coast," he said. "Temperatures earlier this week were also quite mild in the Midwest and Ohio Valley, resulting in much lower natural gas demand for space heating requirements. Population-weighted heating degree days for this week are plummeting and will be in line with where they were two weeks ago. Therefore, this week's storage build (to be reported next Thursday) will be considerably higher, likely exceeding 80 Bcf. Relatively strong storage builds will continue through May since we are now at a time of year when weather-driven natural gas demand reaches a minimum. Still, LNG imports are off by an estimated 2-3 Bcf/d compared to the same time last year, which means reaching triple-digit weekly storage builds similar to May 2007 will be challenging."

Some short-term traders are putting their money on natural gas continuing to follow crude oil prices. "The calendar [strip contracts] were better bid Wednesday. There is a positive tone to the market and it keeps following crude oil. Whatever crude oil does we will copycat it. Maybe not right away, but eventually we will catch up to it," said a New York floor trader.

June crude on Thursday scouted mostly lower prices before closing out the session at $123.69/bbl, up a meager 16 cents.

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