Proving that Thursday's explosion to the upside was less of an aberration than many had expected, the rally in natural gas futures showed some staying power Friday as the April contract closed at $4.227, up 5.3 cents from Thursday and 29.5 cents higher than the previous week's finish.
Many traders questioned whether the rally would have any legs, especially considering its origin. Following the Energy Information Administrations' 30 Bcf storage withdrawal report at 10:30 a.m. EDT Thursday, the front-month contract in less than two minutes shot nearly 75 cents higher and then pulled back 40 cents. The volatility -- especially off what some called an unimpressive storage report -- had some traders questioning whether there was a glitch in the Chicago Mercantile Exchange's (CME) electronic Globex trading platform. CME reported that it experienced no problems during Thursday trade (see related story).
"From a fundamental perspective, the rally back above $4 is totally unjustifiable," said Steve Blair, a broker with Rafferty Technical Research in New York. "We have a 326 Bcf year-on-year storage overhang and it is only going to get worse. People are saying the coming storage report will be flat or might even show a small injection. I don't think the rally was justified, but here we find ourselves still well above $4. We could be finding some support from crude futures, which have been pretty strong for the last week or so."
Despite Friday's small retreat, April crude futures, which are back above $50/bbl, have been on quite a run higher. On Friday the contract shaved 55 cents to close $51.06/bbl.
Other market watchers agree that Thursday's "bullish" natural gas storage report wasn't exactly heavy on the hooves and horns. "While the week's draw of 30 Bcf was well within the range of estimates of 25-60 Bcf, it was stronger than a couple of closely watched forecasts, and somewhat better than the consensus midpoint," a group of Barclays Capital analysts noted in a research note Friday. "The market has grown overly enamored with a single week's storage number before, and our supply/demand balances do not suggest a strong reason for this level of enthusiasm for the near term, i.e, while many in the market will take the week's storage miss to the high side as evidence of resurgent (or at least bottoming) industrial and power demand, we believe that view is premature."
Some traders suspect that Thursday's 49-cent gain will not last. "For the most part, we feel that some large hedge funds rushed to cover shorts simultaneously following release of [the] storage report that indicated only a slight bullish deviation from expectations," said Jim Ritterbusch of Ritterbusch and Associates. "We look for gravitation back down toward the $4 area going forward given the possibility that storage may have already troughed for the season given a relatively mild second half to the month of March."
Weather bulls won't have much to work with if near-term forecasts are correct. Forecaster WSI Corp. of Andover, MA, in its latest six-to 10-day outlook shows a modest accumulation of cold in the upper Midwest but warmth elsewhere. "Warmer-than-normal temperatures are forecast over the southwestern U.S. and the eastern third of the country. Colder-than-normal readings are anticipated in the Pacific Northwest and Upper Midwest. Anomalies are expected to average between two to five degrees warmer or colder than normal," the forecasting firm said Friday.
WSI does offer weather bulls a further caveat that temperatures may trend warmer over the eastern two-thirds of the country than currently predicted. All models suggest that the Eastern Pacific Oscillation will remain in a negative phase in late March, it said.
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