Natural gas futures bulls finally received some sorely needed support Thursday morning after the Energy Information Administration (EIA) reported that a slightly larger than expected 30 Bcf withdrawal from natural gas storage was recorded for the week ended March 13. April natural gas futures shot nearly 75 cents higher immediately following the report's release before closing out the regular session at $4.174, up 49 cents from Wednesday's close.
The push higher in natural gas futures was echoed in crude futures as well. April crude gained $3.47 on Thursday to close at $51.61/bbl.
Just prior to the 10:30 a.m. EDT storage report, front-month natural gas was trading at $3.680, but in the minutes following the release, the contract spiked to a high of $4.424 as rumors circulated that a large trader got out of his short positions in a hurry.
"Word is someone coughed up their short position, but we won't know until Friday when we see the open interest," said Ed Kennedy, a broker with Hencorp Becstone Futures LC in Miami. "A fair amount of buying came in and ran into no selling. We traded up at that $4.424 for a while, with about 3,500 contracts trading in that minute. This is what happens when you're trading on a computer. You don't have the locals to absorb these aberrations. We've seen it before and we will see it again. We call it gaps in the order flow."
As to how some traders deemed the report bullish, Kennedy said he must have been "reading a different book in a different language. I don't think this run-up will be any kind of game-changer. We have no change in the supply situation and the economy is still in the toilet, so I think the upside will have trouble finding follow-through buying momentum."
The broker also had a different take on AccuWeather.com's hurricane forecast Wednesday, which many deemed bearish (see Daily GPI, March 19). "AccuWeather.com's Joe Bastardi said there would be a slightly lower number of storms and that the East Coast is more open for business than the Gulf of Mexico. Need I remind everyone, in 1992 there was only one hurricane, but that hurricane's name was Andrew, which no one will forget.
"What the market has really been waiting for is some insight on what the temperatures will be like this summer. That is the big one. Those forecasts should start to trickle out towards the end of this month into the beginning of April."
Heading into the report, most industry watchers were looking for a pull of 15-20 Bcf, but a Reuters survey of 23 analysts showed withdrawals at 28 Bcf. Research and analysis firm Bentek Energy said its flow model indicated a withdrawal of 16 Bcf. Last year 85 Bcf was withdrawn and the five-year figure stands at 62 Bcf.
Even though Citi Futures Perspective analyst Tim Evans had been looking for a draw closer to 40 Bcf, he still called Thursday's number slightly supportive. "The 30 Bcf in net withdrawals from natural gas storage was slightly larger than the consensus expectation, but still something of a disappointment relative to our own 40 Bcf forecast. The five-year average is 62 Bcf. We'd say this leaves the natural gas market still mired in a bearish supply/demand balance," he said.
According to the EIA, working gas in storage stood at 1,651 Bcf as of March 13. Stocks are now 326 Bcf higher than last year at this time and 228 Bcf above the five-year average of 1,423 Bcf. The East region saw a 26 Bcf deduction and the West region removed 12 Bcf while the Producing region actually injected 8 Bcf.
Looking ahead to next week's storage report for the week ending March 20, weather data seems to point to a smallish storage withdrawal. The National Weather Service predicted lower than normal accumulations of heating degree days (HDD) for major energy markets for the week ended March 21. New England is expected to see 169 HDD, or 33 below normal, and New York, New Jersey and Pennsylvania are anticipated to "enjoy" just 153 HDD, or 29 fewer than normal. The industrialized Midwest from Ohio to Wisconsin is expected to receive 142 HDD, or 48 less than normal.
Fundamental analysts see lower production prompted by an aggressive contraction in drilling rigs coming into some kind of balance with lower consumption derived from the current recession. "At some point, demand should improve at lower prices, at the same time that output should start to fall because of them. Until there is a sign of either of these reactions being drawn into the present, though, they remain in the future," said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consultant.
He added that at some point, prices will have brought supply and demand into equilibrium, "but traders seem to be thinking that hot weather and hurricanes are more likely to arrive first. And they seem pretty distant, right now."
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