January natural gas futures drifted lower Wednesday as traders elected to trade within a narrow range, all the while debating what Thursday’s government inventory report would show. At the end of an uninspired day January futures fell 6.1 cents to $5.462 and February shed 6.5 cents to $5.513. January crude oil rose $1.97 to $72.66/bbl on a supportive petroleum inventory report.

“We are hearing a draw anywhere from 180 to 190 Bcf, but if you get 190, $6 is in sight,” said John Woods, senior trader at Integrity in Energy, New York.

“Today was nothing but range trading. Traders had a short-term objective of $5.55 and that was hit in overnight trading. What is interesting is that when the market came off, it broke below $5.45, but would have had to go down to $5.38 [to reach Tuesday’s low]. Instead it stopped at $5.42, and what that tells you is that there is a lot of range trading going on. It looks [like] trade selling and computer buying.

“The market is pretty much in a stalemate, and the black-box algorithm guys are trading the range and they are just going by what their programs say. You could have sold $5.51 and bought $5.49 several times today. You would have had to watch the market go down to $5.45 and up to $5.53, and that has been the actively traded range. At the end of the day it sold off to the low end of the range, but it seems no sooner does it do that then it is back to $5.51 and you have to ask yourself what changed.

“Everyone is waiting for the [Energy Information Administration (EIA)] number to come out and even last week they were talking about what a big number it would be for this week. The 64 Bcf draw last week came as a surprise, but I haven’t heard anyone talking about a revision. If you are bullish on this market, you are scale-down buying at $5.45.”

The repercussions of last week’s 64 Bcf withdrawal are still being felt. “I still don’t know how you get to that number,” said a Houston analyst. He added that based on the physical flow models it was difficult to arrive at 64 Bcf. “I could get to an upper 40s or 50 [Bcf draw], but not 64. I just don’t see how you do it. Bentek Energy, which relies on flow data, had a 40 Bcf estimated draw.” He did add, however, that some of his temperature-based regression models did show withdrawals as high as 64 Bcf, but physical flow data, which is considered a stronger analytical framework, could not get that high.

“You have to ask yourself what went wrong in the analysis, and were there causative factors such as decreased production or increased demand that we just didn’t see. I have zero confidence in my number this week at a 181 Bcf withdrawal, and I could make a case for 165 or 195 Bcf as well.”

A Dow Jones survey of 16 analysts revealed an average 175 Bcf withdrawal, and Ritterbusch and Associates is expecting a 185 Bcf pull.

Analysts see recent trading as reaching a technical watershed. “There was an important technical or chart feature to Tuesday’s trading, with prices having broken out above $5.32, the market’s critical resistance and significant high point until this week,” said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm. He said Tuesday’s trading “provided the all-too-important second close above that level, in effect confirming the upside breakout seen on Monday. This breakout is far from being insignificant because it gives prices a swing objective to $7.066/MMBtu. It may take time to get there, and there will be stops and starts and reversals, but right now at least, the breakout is very clear in giving us a very clear upside objective,” he said in a morning note to clients.

Students of the economy were pleased with the 10:30 a.m. EST release of EIA figures on petroleum inventory levels. Prior to the report a Bloomberg survey of 17 analysts indicated that crude oil stocks decreased by a median 2 million bbl for the week ended Dec. 11. And late Tuesday the industry-funded American Petroleum Institute released figures saying crude levels rose by 924,000 bbl. The actual figure came in at a decline of 3.689 million bbl. Such a decline, greater than expected, could be interpreted as a sign of increased energy demand and economic strength.

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