Bulls vs. Bears Wednesday: Call it a Tie

A casual observer of the natural gas futures market might look at the narrow losses in the January contract and the modest gains in the out months and conclude there was a quiet, post-expiration trading lull in the Nymex pit Wednesday. December lost 8.5% of its value in its last two trading days, and traders were just easing into trading January, right? Wrong.

In another violent, knee-jerk reaction to the announcement of fresh storage news, natural gas futures spiked to $6.50 only to turn right around and drop down to $6.13 yesterday. According to the American Gas Association, 146 Bcf was pulled from underground storage facilities last week, decreasing total working levels to 2,502 or 76% full. Not only was the withdrawal bullish compared with the 5 Bcf net injection seen during the same period last year, but it also eclipsed the range of market expectations centered on a 90-125 Bcf draw down. According to the AGA, the five-year withdrawal for last week is 44 Bcf.

Delving deeper into AGA historical data shows that never before in the almost 7-year history of storage data has the market pulled so much gas from storage during a week in any month other than December, January or February. In fact, only twice (104 Bcf in 1996 and 108 Bcf in 1997) has the market withdrawn more than 100 Bcf during a week in November.

As those compelling statistics began to set in yesterday, analysts and traders alike were nearly climbing over each other to put in their buy recommendations. The market quickly erupted to $6.50, but after failing to attract additional buying to pressure it above previous continuation chart highs at $6.58 and $6.62, January was slammed lower into the close.

Of all the pundits, perhaps none were as bullish yesterday as Susannah Hardesty of Indiana-based Energy Research and Trading. "The downside correction is over. Confirmed immediately when the AGA's were released minutes ago.. The [-146] number was bullish in everyone's eyes, no matter what happens in the short-term to the weather," she wrote in her intra-day update for subscribers. Despite a disagreement in industry eight- to 14-day weather forecasts (National Weather Service calling for mild temps and a prominent private forecaster predicting cooler-than-usual mercury readings), Hardesty believes the record storage withdrawals are an unavoidably bullish factor going forward.

Looking ahead, Nymex local Ira Hochman agrees that the outlook is bullish in the long term but warns that a break below the market's key momentum support level at $5.94 could lead to further losses. If the January contract is able to develop below $5.94 for at least three hours, Hochman would short January for an anticipated move down to $5.80 or possibly extending to $5.50-62. Support also exists at $6.025, which is a 61.8% Fibonacci retracement from the $5.62 to $6.68 move basis January futures, he added.

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