With the November contract's expiration out of the way, December natural gas spent its first regular session as front month exploring support lines. After notching a low of $12.88, December went on to settle at $13.055, down 62.9 cents on the day and 11.2 cents lower than the contract's previous Friday close. November natural gas expired Thursday at $13.832.
Despite Friday's prompt month decline and Thursday's bearish report of a 77 Bcf storage injection for the week ended Oct. 21, the feeling in the market at the end of the week was that the bulls were still in the driver's seat, according to some market players.
"I think a couple of things played into Friday's decline. The news was a little better out of the Gulf of Mexico and the near-term weather outlook looks a little less supportive,"said a Washington, DC-based broker. "Now we are looking back to the old November support level of $12.68-70 on a continuation chart. Everybody still appears to be buzzing around that number."
She added that Friday's activity did nothing to dissuade her from the opinion that futures were still bullish. "Talking to our customers and traders, I have to tell you it appears that everyone is still optimistic on this market's bullish case," the broker said. "People are still throwing around these larger numbers and I think they are really waiting to see what happens with the weather this winter."
She noted that word from her company's marketer clients around the country only reinforce the market's bullish case. "When the market comes down, as it did today, their customers are in buying these strips. We are selling long-side paper all day long on days like today. I really think that shows the current mentality of the market," the broker said.
"Even though we are in this corrective chop every time we get some bearish news, I still believe the downside remains rather shallow because of the concerns over winter later this year. If you really put some weather into this equation without those Gulf facilities being back online, we are really going to be in a pickle."
Whether demand destruction is the culprit for these large storage injections late in the season or not, there is clearly something going on with the demand side of the equation, said Mike Rothmann, senior managing director of ISI Group. He calculated that the market is losing "almost 40 Bcf per week of production from the Gulf Coast and it's probably more than that if you include the onshore Louisiana volumes." He noted that it was clear that given those losses and recent storage injections, "substantially larger volumes are being injected than would have been expected."
On Thursday, the Energy Information Administration's reported injection was substantially larger than industry expectations, marking the second consecutive week that industry experts have been stunned. A week earlier, 75 Bcf was added to underground facilities, 15 Bcf more than predicted by the ICAP storage-options auction. This time the miss wasn't quite so wide as the ICAP auction revealed a consensus build of 67 Bcf, just 10 Bcf off the mark.
Repairs to Gulf production facilities grind on. On Friday, the Minerals Management Service (MMS) reported that shut-in gas production following Hurricanes Katrina, Rita and Wilma fell to 5.504 Bcf/d from 5.559 Bcf/d on Thursday. This shut-in gas production is equivalent to 55.04% of the Gulf's normal 10 Bcf/d production. As of Friday, a total of 364.7 Bcf has been shut in since Aug. 26, which is equivalent to 9.992% of the Gulf's usual 3.65 Tcf a year in production.
Looking ahead, the near-term weather outlook got a little more bearish Friday. According to the National Weather Service's six-to-10-day forecast Friday -- which covers Nov. 3-7 -- above normal temperatures are expected across a broad swath of the U.S., excluding the West and East Coasts, which are likely to experience normal temperatures. The tip of New England and the western edges of Oregon and Washington could see below normal temps.
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