Futures Tumble then Rebound Amid Bearish Storage Data

For the second Wednesday in a row, natural gas prices were hit with a wave of selling seconds after the release of fresh storage news. However, whereas the market closed on its daily lows last Wednesday, it finished on its highs yesterday as bargain hunting lifted the November contract almost 15 cents above its $5.15 low Wednesday.

The major cold front that is expected to drop low temperatures into the 30s as far south as Texas and Louisiana over the weekend was seen as the impetus for the late price rise.

According to the American Gas Association, 78 Bcf was added to underground storage facilities last week, bringing total working gas in storage to 2,480 Bcf or 75% full. Prior to the release of the report, traders had been looking for a 60-70 Bcf addition, which would have fallen closer to last year's 62 Bcf build. Not since the Fourth of July week when 97 Bcf was stuffed into the ground, has the market recorded such a large refill. And other than back-to-back 78 Bcf injections in early June, last week's storage tally is unmatched this injection season.

After learning of the hefty storage injection, traders were quick to point to the economic incentive to put gas into the ground that existed last week. "The [prompt cash vs. Nov. futures] spread made sense last week. If you were a storage player and had the means, it was advisable to inject," a trader said. The average spread between NGI's daily Henry Hub spot price and Nymex November futures last week was 10 cents, more than enough to cover most storage operators cost of carry.

Another trader echoed that sentiment and looks for the relatively large injections to continue through October. "In an effort to avoid carrying charges, at-risk storage buyers in the producing region picked up October contracts back in March and April with the intention of taking them to delivery. Because of that, they are now long physical gas and more than happy to put it in the ground in an effort to play catch up."

Moreover, he believes that the East consuming region will continue to account for a lion's share of the weekly injection total. "While they are injecting in the producing region for economic reasons, they are injecting in the east for contractual reasons. For at least the first couple weeks of October, I expect to see little change from the 45-55 Bcf injection that the East has contributed for several months now. Storage operators have ratchet provisions, which dictate how much gas must be put into the ground and until those are met, people must continue to inject."

Looking at AGA historical data, he may have a point. Last year, the East consuming region saw a steady flow of about 45 Bcf into the ground each week from June through September leading to a 90% full level the week ending Oct. 1. After reaching 90% full, however, the injections slowed appreciably last year. And while the East has been able to inject about 50 Bcf each week during the same June through September period in 2000, it is only 82% full, which makes it possible for the market to continue to funnel gas into the ground at the same 50 Bcf rate. For a market that is concerned with year-on-year comparisons, this phenomenon could lead to a couple more Wednesday afternoon price dips. Ironically, this week last year, the market injected 31 Bcf in the East and only 49 Bcf total.

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