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Bearish 59 Bcf Storage Injection Prompts Futures Fall

While hot weather and hurricane-related shut-ins had the energy industry looking for a small natural gas injection in the neighborhood of 52 Bcf, the Energy Information Administration (EIA) reported Thursday morning that 59 Bcf was actually put into underground stocks for the week ended July 15.

The news was immediately deemed bearish by traders as August natural gas futures dropped from $7.59 to $7.35 in the first four minutes following the report. The prompt month dropped even lower to record a $7.25 trade before settling at $7.30, down 25 cents from Wednesday. August natural gas hasn't traded as low as it did Thursday since July 7, when it also recorded a $7.25 low on the day.

"We closed near the bottom of the range on the day so Thursday was just a good solid bearish day," a Washington, DC-based broker said. "We broke that shorter term uptrend line that began the rally on June 30 up around $7.60 the other day. With the larger than expected storage number Thursday, we sold off significantly all of the way down to a low of $7.25.

"Now we are down below the larger uptrend line of the rally that started back at the end of May," the broker added. "It still looks like we can grind a little lower here, possibly down to the $7.00 level. We got down and touched a trend line support and ended up breaking through it this time, so I think we have a moderate degree of weakness ahead of us here."

Looking at trading for Friday, the broker said he will have to see how much more momentum to the downside there is ahead of the weekend. "If we break down below $7.20, I think we will probably continue to grind lower...possibly to $7.00 ahead of the weekend," he said. "However, there is that one storm that is still [in the Atlantic], but it might be headed toward the Gulf. So I don't know if we want to go home short in front of a possible hurricane."

As of Thursday afternoon, the National Hurricane Center reported that a ship in the vicinity of the storm, which was just east of the Central Bahamas, estimated that winds had reached tropical storm force. More news would be available Friday, the center said. The current forecast calls for the storm to stall north of the Bahamas for the next several days.

Storage expectations had been calling for an injection in the 37-69 Bcf range. The ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 52 Bcf injection.

While the actual 59 Bcf injection was bearish when compared to the industry consensus, it compared bullishly versus a 77 Bcf addition last year. The five-year average injection for this week is also 77 Bcf, according to EIA data.

Working gas in storage now stands at 2,339 Bcf, according to EIA estimates. Stocks are 122 Bcf higher than last year at this time and 220 Bcf above the five-year average of 2,119 Bcf.

The East region contributed 47 Bcf to underground stocks, while the West and Producing regions chipped in 7 Bcf and 5 Bcf, respectively.

Risk managers are in a dilemma over strategies. "My clients are buying the July-December futures strip for $7.90, and obviously they think it will be higher than $7.90 or they wouldn't do it," said a California derivatives specialist prior to trading Thursday. "If you do that you must be believing that the market will be $9, $9.50, or $10. You don't put on a $7.90 strip thinking the market is going to break to $5.50," He added he thought a better strategy would be to use options.

"Earlier, we put on $6 to $8 call spreads (buying $6 call options and selling $8 calls) at 40 cents and now they have advanced to $1.60," he noted.

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