Gas futures continued to move down Thursday morning from an overnight Access high of $7.20 and shifted around in the low $6.90s before the EIA’s storage report of a 176 Bcf storage withdrawal provided even more selling pressure. April ended the session down 17.7 cents to $6.844, which makes four straight daily declines. Trading ranges remained very wide with a daily high for April on Thursday of $7.00 and a low of $6.690.

The weekly storage withdrawal was within average market expectations but viewed by some as slightly on the low side. The EIA reported that there was 838 Bcf of working gas in storage at the end of last week, which was 981 Bcf less than the same time last year and 602 Bcf less than the five-year average. The 176 Bcf withdrawal compared with a 170-185 Bcf average range of market expectations, a 143 Bcf withdrawal during the same week last year and a five-year average withdrawal for the week of about 83 Bcf.

Working gas levels in the key East region are 59% lower than where they were last year and 49% below the five year average, and many observers have expressed concerns about the ability of the industry to bring working gas levels up to historical 3 Tcf fall averages by November at a time when production is down and gas-fired combined cycle power generation is expected to grow as much as 40% this year.

Despite the low level of working gas, however, Ed Kennedy of Commercial Brokerage Corp. believes this week’s string of lower daily moves in the near-month contract shows the market is beginning to respond to bearish seasonal indicators.

“The latest urban legend is there isn’t enough gas being produced to refill storage, but I think that’s a bunch of hooey,” said Kennedy. “I don’t see any trouble about getting back to 2.7-3 Tcf [by November],” he said. “Demand is higher but production is not off as much now as everyone thinks.

“I think we’ll test the low $6 area and then find out if the trend holds. The uptrend line is somewhere down there around the $6.20-30s. We’ve been moving $1-1.30 a day so we could be testing it shortly. I think it will happen in the next week. Then we’ll find out what this puppy is made out of.”

Tom Saal, Kennedy’s associate at Commercial Brokerage, noted the market has only come down from these levels once before, and this time around probably will be similar to the last time. “We went from $2 to $10 in 12 months in 2000 and then we went from $10 to $1.76 in nine months. When we went down, every even dollar had support and once it dropped past that support it kept falling.

“It was kind of a similar circumstance last time where we had kind of a cold winter — with some other things obviously happening in California — and the same fears about not being able to put enough gas in storage in the summer,” Saal noted. “But we ended up having an average summer, the world didn’t come to an end, and the prices, once they started to trend lower, reacted to bearish reports.”

Saal said that technically the market hasn’t even started to trend down yet. “We took out a real steep trend line last week, but that was no big deal. The line closer to $6 is the one you need to pay attention to. But we are looking for a continued deterioration in price this week.”

Tim Evans, futures analyst at IFR Pegasus, disagreed that prices will continue to fall Friday. “Not that this is any golden rule or anything, but when the market trends Monday through Thursday, I look for a reversal on Friday. The trend has been down so I would say book-squaring for the weekend is probably going to be supportive and give us a push to the upside. Do we get through $7.20? I don’t know, but my guess is we’re going to try and move higher.”

Evans also doesn’t buy the longer-term comparison with the last time prices fell from the $10 peak. He thinks this year will be far different than 2000, and the market will have a much more difficult time achieving downward objectives because of the weak supply situation and new generation additions. Although drilling has rebounded, it is not nearly as far along as it was in 2000 at this time, he noted.

“When prices peaked in December of 2000, the drilling rig count had already been climbing steeply for six months. This time around we’ve only just moved above the five-year average [rig count] in January,” Evans noted. “We’re not as far along in getting a supply response to the high prices. We may see it, but I wouldn’t look for it before the third quarter.”

He also doesn’t think the market has seen the price peak yet in the longer-term cycle. But it probably won’t arrive until next winter, said Evans. “Storage in the spring of 1996 got as low as 697 Bcf, and from that low we struggled to build storage back up. In December 1996, we hit what was an all-time high at that time of $4.60. Those were the days. It sounds so quaint to think of $4.60 as a record high. We thought the market was volatile then!”

Evans sees storage reaching record lows this April and expects low production and high demand from generators this summer to hinder storage refill, setting the market up for even higher prices next winter.

In the near term, he said to expect the out-months to continue trending higher. On Thursday despite April’s 17.7-cent fall, May, June and July made higher highs and higher daily lows. The spread between April and May remains extremely wide at 79 cents, leaving plenty of room for the out-months to gain ground.

Nymex said Thursday that it will extend the trading hours for its energy contracts on the Access electronic trading system to 9:30 a.m. EST beginning March 10. Currently, electronic trading for energy futures on Access ends at 9 a.m. and the open outcry markets begin at 10 a.m.

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.