After holding support following a knee-jerk downward reaction to the latest industry supply data, natural gas futures vaulted higher in two distinct buying surges. The first rally consisted of a move back above $3.30 that came on the heels of the 10:30 a.m EDT storage report. After a brief siesta, bulls were running Thursday afternoon, lifting prices convincingly higher into the close. October finished at $3.342, up 14.9 cents for the day and 24.2 cents above its early-session low.

According to the Energy Information Administration, working gas in storage rose 65 Bcf to 2,781 Bcf on Friday Aug. 30. Stocks were 205 Bcf higher than the same time last year and 310 Bcf above the five-year average of 2,471 Bcf. In the East Region, stocks were 94 Bcf above the five-year average following net injections of 53 Bcf. Stocks in the Producing Region were 154 Bcf above the five-year average of 656 Bcf after a net injection of 7 Bcf. Stocks in the West Region were 63 Bcf above the five-year average after a net addition of 5 Bcf.

Compared to expectations centered on a 60-73 Bcf build, the 65 Bcf refill was not a surprise. The previous week’s injection was 59 Bcf, and 76 Bcf was injected during the same week last year. As it turned out, both bears and bulls had their chances in the 30 minutes following the report. Bears attacked first and were successful in pushing the prompt month down to Tuesday’s low at $3.10. However, after failing to get much follow-through selling from non-commercial fund traders, the sellers were forced to concede defeat. The market was quick to react, gaining 14 cents in the next 10 minutes.

“This is a dip; buy it,” said Tom Saal of Pioneer Futures in Miami. “We are reverting to the types of wild swings that we had back when the [American Gas Association] released the number at 2 p.m. We are seeing people pull their limit orders right before the number comes out,” he said in explanation of the morning’s volatility.

By pulling their limit orders, traders create a vacuum above and below the market’s level that can be sliced through very easily. It was not uncommon for the prompt natural gas contract to etch a 30-cent trading range in the 10 minutes following the AGA’s Wednesday afternoon report. Since taking over the report back in May, the EIA has been forced to issue numerous revisions that have eroded the market’s confidence in the number. However, as evidenced by the volatility this morning, it is possible that traders are beginning to trade off the EIA number like they did the AGA figure.

However, by Thursday afternoon the storage numbers were a distant memory. In its place, traders found themselves digesting a bullish supply-demand one-two combination blow. According to Mark Papa, CEO of EOG Resources Inc., domestic natural gas production will fall more this year than it has in 16 years, roughly 5-6%, and it’s “going to get a bit uglier” in the years to come. Even with a more ambitious drilling program next year, the decline will only be slightly contained, which will lead to “huge consequences” for the future, he told attendees at Lehman Brothers 2002 CEO Energy/Power Conference in New York City (see full story this issue).

That supply shortage forecast was just half of the news. Also of interest to fundamental traders yesterday was bullish demand outlooks from a notable private weather forecaster. According to Massachusetts-based WSI Corp, November is expected to be significantly cold in parts of the upper Midwest and Rockies, which will boost heating demand in those regions, “with bullish implications for gas and, to a lesser extent, power prices…. we continue to expect a very cool beginning to the heating season in places like Minneapolis and Chicago,” said WSI seasonal forecaster Todd Crawford (see full story this issue).

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