Anticipated Storage Withdrawal Drives May Contract 10 Cents Higher

Anticipation of an even larger gas storage withdrawal this week and higher cash prices have continued to prompt short covering and draw additional buying interest into the futures market. The May contract added 10.1 cents on Tuesday, closing at $5.653 with a high of $5.695, and the out-months made even steeper gains.

"It's been 'buy the rumor and sell the news,' or potentially 'buy the colder weather last week and sell the storage report' this week," said Tim Evans, futures analyst with IFR Pegasus. He believes there may be a sell-off once the storage report comes out, possibly sooner, because of the warmer weather this week. But he sees longer-term buying interest continuing to enter the market based on the realization that prices have established a long-term bottom at $5 or $4.865 (April 3 Access).

Based on the number of heating degree days (HDDs), many market observers are expecting an even larger storage withdrawal this week than the 9 Bcf that the Energy Information Administration reported last week for the week ending April 4. There were 128 population weighted HDDs last week compared to 100 the week before.

"It was a pretty nice step up in demand last week. I'm looking for 20-30 Bcf this week," said Evans. "I've seen up to 45 Bcf quoted and as low as 10 Bcf as well. I think there's a consensus that it will be somewhat more than last time."

Cash prices also provided some support Tuesday. Prices at most spot points were up 25 cents with some northeastern locations even higher. Another bullish factor is the double net short positions of speculative fund groups and large commercial traders in the latest Commitment of Traders report by the Commodity Futures Trading Commission. On Friday, the COT report showed that speculators were net short 4,576 contracts, a relatively small amount, while commercials were net short 21,945.

"Usually one offsets the other, but this last report showed them both short and the market cannot support a majority opinion," said Tom Saal of Commercial Brokerage. "It happens from time to time and usually will quickly go away. Recently both the speculators and the large commercial traders were thinking the market would go lower. What's probably happening now is that the funds, who usually are the quickest to change, are likely buying back their short positions and maybe go long here."

Saal said he expects a near-term objective of $5.75 based on a Fibonacci retracement level on the March contract. However, he also noted that a storage withdrawal already may be priced into the market here and that warmer weather could pressure prices lower. "What's interesting is there won't be any trading on Good Friday, which should create some volatility on Thursday."

Traders will have to weigh the storage report and the warmer weather this week. Only 67 HDDs are expected. While the bears could eventually gain the upper hand, Evans doubts there will be a new sustained downtrend. "What I think we have instead is a flow into the market by those who see that the price has bottomed on a longer term basis. Five bucks is now the floor."

The recent open outcry low was $4.885 on April 4. "That's generally considered the bottom now," Evans said. "Could the May or June contract at expiration drop back to that level again? Maybe. But you are not going to see a sustained price at $5 again.

"If you are a consumer, it's a defensive move to buy right now. You just need to protect yourself." Evans sees $5.80 as a possible target for the May contract on the upside followed by $6 and $6.32.

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