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Despite Bearish 89 Bcf Storage Build, Futures Rally Late

Shocking the natural gas industry on Thursday, the Energy Information Administration reported that a bearish 89 Bcf was injected into underground storage for the week ended Sept. 9. While October natural gas futures fell lower on the number, an afternoon rally off of support levels helped the contract settle 17 cents higher on the day at $11.336.

Putting a halt to storage shortage speculation for at least the week, news of the injection put downward pressure on futures prices immediately. In the minutes following the report's release, October natural gas dropped 37 cents to trade at $10.95 as of 10:32 a.m. EDT. After bouncing off a low of $10.86 in morning trade, the prompt month leveled off in the $11.05 area before jumping higher at the end of the session.

"The storage number was off the charts," said Tom Saal of Commercial Brokerage Corp. in Miami. Borrowing from Mark Twain, the broker said, "Reports of a storage shortage have been greatly exaggerated. People didn't seem to have very good information on the natural gas demand side of the equation. The reason this number was likely so large was the lack of demand."

As for the turnaround in the afternoon, Saal said the day was easily divided into two separate sessions. "I really think that trading on Thursday was a two dimensional thing, where we had the bearish number in the morning and we had some selling. The local traders sold as well," he said. "When it sold down to $10.86, support came in bringing buyers. The locals then turned around and started bidding it up. What I heard from the trading floor was that once it got to $11.14 there were a lot of fund stop-orders clustered there. They were also clustered around $11.25."

Saal said he believes traders continue to closely monitor the shut-in figures in the Gulf of Mexico in Hurricane Katrina's aftermath. Shut-in levels continue to slowly decline with the latest Minerals Management Service update reporting Thursday that 3.411 Bcf/d is still offline, down slightly from the 3.518 Bcf/d reported a day earlier. "Those numbers are definitely supporting the market because the shut-in level isn't declining very convincingly," Saal said.

A new report by First Enercast Financial (FEF) analyst Agbeli Ameko warns that Katrina will cause total lost production that is between 25-30% greater than it was for Hurricane Ivan in 2004, which took roughly 173 Bcf offline.

Looking at winter 2005-2006, the analyst predicted "record high" natural gas and heating oil prices due to a colder than average winter, supply shortages, and strong demand. He noted that an FEF model calls for a shorter shoulder season followed by cooler than average temperatures for the winter months.

On Thursday, petroleum futures finished the day moderately lower. October crude settled at $64.75/bbl, down 34 cents on the day. October unleaded gasoline and October heating oil closed lower by 3.86 cents and 1.29 cents, respectively, at $1.8987/gallon and $1.9120/gallon.

Turning attention back to the natural gas storage situation, the 89 Bcf injection came in roughly 20 Bcf higher than the ICAP-Nymex storage options auction estimate of 69.1 Bcf. A Bloomberg survey of 19 analysts was looking for an average injection of 59 Bcf and a median injection of 64 Bcf. The 89 Bcf build was slightly below last year's 96 Bcf injection, but it eclipsed the five-year average build of 86 Bcf.

Working gas in storage now stands at 2,758 Bcf, according to EIA estimates. Stocks are now 102 Bcf less than last year at this time and 98 Bcf above the five-year average of 2,660 Bcf.

The East region injected 58 Bcf into underground storage, while the Producing and West regions chipped in 22 Bcf and 9 Bcf, respectively.

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