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Diminished Futures Liquidity Produces Wild Storage Ride, Quiet Close

Recording their second consecutive volatile reaction to a natural gas storage report (see Daily GPI, April 3), May natural gas futures on Thursday morning traded violently up and down surrounding the news that 20 Bcf was injected into underground inventories for the week ending April 3. Following the two-minute mayhem, the prompt-month contract resolved lower before closing the session at $3.610, down only two pennies from Wednesday's finish but 19.1 cents lower than the previous week's finish.

In the minutes prior to the 10:30 a.m. EDT Thursday report, May futures were trading at $3.684. At 10:29 a.m., the contract spiked to a high of $3.824 but then swung 24.2 cents lower in the minute of the report's release to trade at $3.582. Futures put in a morning low of $3.550 at 10:41 a.m.

Hencorp Becstone Futures LC broker Tom Saal said low liquidity in the market during the last few days has made the recent price moves not as important. He added that besides the 15 minutes surrounding the storage number release, it was a pretty quiet day.

"There was not much going on out there," he said. "The storage number was pretty much in line with expectations. There was a little rally up and then a sell-off. I think the volatility blip was due to the lack of liquidity as a lot of folks had decided to extend their already long weekend. During that blip, I think some people got in and then immediately got out, which pushed the market around. The lack of liquidity certainly allows for larger price ranges on smaller volumes."

Saal said he still thinks the market is basically range trading. "We've seen the negative fundamentals and they are already factored into this thing," he told NGI. "However, there's nothing overly bullish poised to swoop in and change things, so we'll probably continue to trade in this are for the time being."

Disagreeing with Saal, Citi Futures Perspective analyst Tim Evans said Thursday's storage report came in "above street expectations" for the week.

"The build of 20 Bcf was above the expected 10-13 Bcf range and over the 13 Bcf five-year average, pushing the year-on-five-year average storage surplus to a new high of 310 Bcf," Evans said. "Total storage is also near the top of its five-year range for this stage in the season. While not shocking, we think this report was mildly bearish and confirms that the over-fundamental balance in the market remains a surplus."

In the days leading up to the report, the industry had been looking for a build between of 15 Bcf and 25 Bcf; however, that range was lowered as the report's release date drew closer. While the actual injection topped the five-year average, it absolutely blew away the 16 Bcf draw that was reported for the similar week a year ago.

According to Energy Information Administration data, working gas in storage stood at 1,674 Bcf as of April 3. In addition to being 310 Bcf above the five-year average of 1,364 Bcf, stocks are now 438 Bcf higher than last year at this time. The Producing region led the injection charge by depositing 13 Bcf, while the East and West regions injected 6 Bcf and 1 Bcf, respectively.

Market technicians suggest that prices will advance in the short term followed by a continuation of the ongoing downtrend. "It looks like a five-wave pattern down from the $4.424 either ended at Wednesday's $3.531 low or is about to end," said Walter Zimmerman of United Energy. Once a five-wave pattern is completed in the dominant direction (in this case down), it is not unusual for the market to at least temporarily reverse direction. "From a completed five-wave decline from $4.424 we expect a bear market correction higher, and then a resumption of the downtrend. So even if our long-awaited $3.520-3.210 holds on the first test, we expect only a bear market correction from there," Zimmerman said. He places near-term resistance at $3.745 and support at $3.520.

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