Natural gas futures traders mostly breathed a sigh of relief Thursday morning as the outsized 108 Bcf injection of the previous week’s natural gas storage report proved to be a one-time thing. However, despite an only slightly bearish 93 Bcf injection report this week, October natural gas futures plumbed two-year old support before closing at $4.781, down 15 cents on the day.

After trading at $4.840 just prior to the 10:30 a.m. EDT storage release, October natural gas knee-jerked lower on the report to trade at $4.750 before rebounding a few minutes later back up to $4.840. The prompt mont put in a low of $4.600 in the afternoon before moving higher to close. The $4.50-4.60 area is no stranger to support trends. The last time front-month natural gas futures ventured this low was in September 2004 when the October 2004 futures contract fell to $4.520 before rebounding higher.

Once again, the winter months came off at a more accelerated pace than the October contract, bringing the October-January spread down to $3.100. January natural gas closed 32.6 cents lower on the day at $7.881. Four days after the natural gas futures losses at hedge fund Amaranth Advisors LLC were revealed, the industry is still attempting to figure out the ramifications on the market (see related story).

“With October going off of the board next Wednesday, I would expect to see a short-covering rally one day next week,” said natural gas futures market technician Rich Bruskoff. “It appears that Amaranth was long the October-January spread and long the March-April spread. Obviously, March-April has come in from $2.25 last week to Thursday where it is worth 58 cents, so it lost 70% of its value in a short time frame, which is pretty ridiculous.”

The buying and selling of calendar spreads has increased over the last couple years by local traders trying to manage both the higher volatility and prices in the natural gas futures market. Because spreads involve the simultaneous purchase of one month and sale of another month, a lower margin requirement is necessary, allowing the trader more trading flexibility. In the vernacular, a trader “buying a spread” is purchasing the more expensive month and selling the cheaper month. Conversely, in selling the spread, he or she would sell the more expensive month and buy the cheaper month.

Bruskoff also noted that November settled 1.1 cents lower Thursday while January was 32.6 cents lower. “So, you are seeing these people buying the November-January spread as the market awaits November’s turn as spot month,” he said. “For Friday, I think people will buy November pretty hard into the open.”

As for the repercussions from the Amaranth losses, Bruskoff said he doesn’t think the full story has played out, adding that other hedge funds could be in similar positions. “I don’t think we have seen the full fallout of Amaranth on the market yet,” he said. “I think they liquidated some and now it falls to whoever has their book. It is all hearsay at this point, but I guess that’s JP Morgan and Citadel. I think we will probably see a pop in the March-April spread within the next month. This time of year, that spread is normally trading $2.00-2.50. Currently, it is trading at 58 cents. Right now it is just too risky because of all of the Amaranth hoopla. You also have to remember, it is not just Amaranth and its $5 billion natural gas position out there. Do you really think there is no hedge fund out there with the same position? Whoever they are, they also have to get out of that position.”

The Energy Information Administration (EIA) announced Thursday that an only slightly bearish 93 Bcf was injected into underground stores for the week ended Sept. 15. Leading up to Thursday’s report, traders were on pins and needles with last week’s 108 Bcf injection report still fresh in their minds. That report dropped front-month futures below $5 for the first time in two years. Even though the 93 Bcf build was less than last week, it still came in above expectations and historical comparisons

“While it was no 108 Bcf, the 93 Bcf build is still a bearish number above expectations,” said Tim Evans, an analyst with Citigroup. “It just adds that much additional weight on top of this futures market to limit the upside and leave the downside open. It is also a sign that the producers have not reined in any of the marginal production that is continuing to pad the surplus. As long as they continue to pump it out, the price they get for it will continue to decline.”

Evans noted that while the forward contracts have been coming back in recent days, they are still at a premium. “Those forward contracts may be encouraging producers to maintain production at the higher level because they’ll want to be able to sell that $8 gas, which is still a very profitable number,” he said. “The producers also have a pretty nice cash cushion under them following some pretty good times over the last year, so they could be of the belief that short-term price weakness is something they can ride out.”

The 93 Bcf build was just above estimates for the week. A Reuters survey of 21 industry players had been calling for an average injection of 90 Bcf, while the ICAP derivatives auction held after the close of Nymex floor trading Wednesday revealed a consensus estimate of an 87.8 Bcf build. Golden, CO-based Bentek Energy had said it was expecting a storage injection of 89 Bcf. The build was well above last year’s 76 Bcf injection for the week and 10 Bcf over the five-year average injection of 83 Bcf, which only adds to the current storage surplus over past years.

According to the EIA, working gas in storage stood at 3,177 Bcf as Sept. 15. Stocks are 356 Bcf higher than last year at this time and 352 Bcf above the five-year average of 2,825 Bcf. The East region led the charge with a 54 Bcf injection, while the Producing and West regions chipped in 29 Bcf and 10 Bcf, respectively.

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