May natural gas futures posted a stout double-digit gain Thursday ahead of an extended holiday weekend as traders reacted to a government inventory report showing storage gas to be somewhat less than anticipated. At the close May had advanced 10.2 cents to $4.412 and June gained 10.9 cents to $4.466. June crude oil continued its winning ways, posting a gain of 84 cents to $112.29/bbl.
The 10:30 a.m. EDT release of underground storage data by the Energy Information Administration (EIA) proved to be the dominant price driver, and before the data was released traders' expectations had fallen right in the middle of last year and five-year trends. The five-year average injection for this time of year stands at 34 Bcf, but last year a plump 75 Bcf was injected. The actual figure came in at 47 Bcf, somewhat lower than what the market was projecting.
Market reaction to the data was swift and furious. Within the first five minutes of trading following the release of the data May futures traded as high as $4.370 and as low as $4.271. By 10:45 EDT May was at $4.367, up 5.7 cents from Wednesday's settlement.
"Prices took a little bit of a jump off the [inventory] number since some were looking for a build of about 55 Bcf to 56 Bcf, but overall the expected range was 46 Bcf to 56 Bcf and it's not that big a deal," a New York floor trader said.
Prior to the report surveys showed expectations of a higher injection. A Reuters survey of 27 traders and analysts resulted in a sample mean of 53 Bcf and Citi Futures Perspective analyst Tim Evans was expecting a 58 Bcf increase. Bentek Energy forecast a 51 Bcf gain.
Evans commented after the report, "The smaller-than-expected net injection for last week was supportive, reflecting a tighter-than-anticipated supply-demand balance, possibly related to the above-average level of nuclear plant refueling outages. It was the second consecutive weekly miss on the bullish side of consensus expectations. The build was still above the 34-Bcf five-year average, increasing the year-on-five-year average surplus to 23 Bcf, and we continue to think that 'near average' is a fair characterization of storage."
Top traders don't see much left to the market's upward drive of recent weeks. "The advance to the $4.42 area met our near-term stated objective, and we will look for some price consolidation at around this level on Monday. We may look to approach the short side of the market depending upon weekend updates to the temperature views," said Jim Ritterbusch of Ritterbusch and Associates.
Ritterbusch sees funds and managed accounts looking to re-establish short positions. "For now, we are still viewing [last] week's upside price acceleration as largely related to fund short-covering, and we feel that the institutions will be looking to re-establish shorts by [this] week. The production factor remains tilted in a bearish direction, and we still expect a stronger-than-normal injection cycle through the balance of the spring prior to increased weather influence off of hurricane activity and hot temps."
Over the past two weeks May futures have advanced 37.1 cents and Ritterbusch sees the potential for the market to give that and more back. "In sum, while the jury is still out regarding the sustainability of the price advance of the past two weeks, we will be looking for evidence of a price top early [this] week as an opportunity to establish shorts in anticipation of a decline back toward the $4.00 area."
Bulls scored Thursday. But the stage is set for an extended scrimmage between supply bears, citing ample beginning inventories along with expectations of healthy production, and supply bulls, counting on injection-interrupting hot weather, tropical storm-related Gulf of Mexico shut-ins along with the potential for an improving economy boosting industrial demand.
In its weekly report Bentek put the injection season in historical context and noted that the last two seasons have shown extreme weather patterns and it doesn't expect those kinds of extremes to repeat.
"The winter of 2010-2011 was the 27th coldest winter during the past 60 years, causing storage inventories to start the injection season 131 Bcf below the five-year high set last year despite record-high production levels. The past two seasons have both had extreme temperatures, which seems unlikely to happen during the summer of 2011," the firm said. Bentek is weighing in on the side of the supply bears and expects storage levels at the end of the injection season to establish a new record above 4 Tcf.
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