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Unexpected Mid-Winter Storage Injection Sends Futures Plunging Sub-$10

The Energy Information Administration (EIA) shocked even the most veteran industry prognosticators Thursday, announcing an "incredibly bearish" 1 Bcf addition to natural gas storage inventories for Christmas week. The injection, which sparked questions about the report's validity, sent February natural gas plunging lower Thursday to settle at $9.499, down 69.8 cents for the day.

With injections in December virtually unheard of, natural gas futures market traders quickly pressured an already declining prompt month futures contract even lower. The February contract had opened Thursday nearly 30 cents lower than Wednesday's $10.197 close in anticipation of a small withdrawal. The $9.900 open was also the contract's high on the day. February natural gas' plunge was pressured down even further by the injection reported at 10:30 a.m. EST.

In the minute following the report's release, February natural gas dropped 30 cents from $9.850 to $9.550. The prompt month seemed to find some support at $9.390-$9.400 before inching higher to close.

"While the fundamental picture still likely doesn't warrant $9.50 gas, neither did [the picture warrant] $15+ gas," said Jay Levine, a broker with enerjay LLC. "Which leaves me to conclude, as I have always maintained, that while prices are only now coming into line with the basic picture, one never knows when unbridled concerns [will] hit the market once again broadside, thereby reversing some, if not much, of the recent decline. Even if the longer-term trend remains down, a bounce is long overdue."

It appeared that the natural gas market, spooked upward through the second half of 2005 by an equally incredibly active hurricane season now is running through a winter season without much cold weather.

Plagued by production shut-ins in the Gulf of Mexico as a result of the overly active 2005 Atlantic hurricane season, natural gas prompt-month futures peaked at $15.780 back on Dec. 13, 2005 on supply concerns going into the winter heating season. As of Thursday, the Minerals Management Service reported that a little more than 574 Bcf of natural gas had been shut-in in the Gulf due to hurricanes since Aug. 26, 2005, which is equivalent to 15.732% of the 3.65 Tcf in yearly production out of the resource area.

However, the recent prolonged stretch of mild weather, speculation of natural gas demand destruction due to high prices, and overall storage levels have helped to rein in the price spike. The last time a prompt month traded as low as $9.400 was on Aug. 25, 2005, when the September futures contract hit that level prior to the Hurricane Katrina price spike.

Unseasonably warm weather over a vast majority of the country last week was responsible for Thursday's highly abnormal storage report. During the same week last year, a 155 Bcf withdrawal was reported, and the five-year average withdrawal for the week is 135 Bcf.

Some industry experts were projecting a very small withdrawal for the week ended Dec. 30, but the injection came as a shock, leading some market watchers to wonder whether EIA's report was correct.

Commenting on the swirling rumors that the report might have been incorrect, Levine said the surprising build of 1 Bcf had people talking about a possible revision. "Someone was bound to cry foul," he noted.

In response to the rumors, the EIA pointed to its methodology. "We have not announced there is going to be a revision yet," said Paul Hess, an EIA information specialist. "We can not tell you whether there will be a revision due to our policy. If there is a revision, what they will do is announce that there will be a revision after 1 p.m. EST on any business day. If there is a revision, it will be posted around 2 p.m. on that day."

Under the agency's storage methodology, revisions generally are reported in the EIA's Weekly Natural Gas Storage Report according to the established schedule and occur when the effect of reported changes is at least 7 Bcf at either a regional or national level. If a revision is made, changes to all regions are recorded. While changes will be made for revisions of less than 7 Bcf, the changes shall only lead to a published revision when it is at least 7 Bcf.

Citigroup's Kyle Cooper, whose storage report prediction of between a 12 and 22 Bcf withdrawal was one of the lowest, called the 1 Bcf injection "incredibly bearish." However, he added that he does not believe a significant revision is warranted.

"There are numerous rumors regarding a revision to the NG storage number," said Cooper. "There is one anomaly that may result in a base gas to working gas revision of 5-7 Bcf. We do not believe a revision of significant magnitude is warranted as one of our outlier models did indicate a build of 0.4 bcf. This is probably a bit of an anomaly to the bearish side, just as we do believe the draw of 202 Bcf a few ago weeks was a bit of an anomaly on the bullish side. Pipeline pressure swings and other timing issues can easily result in 'deviations' from what is expected. There may well be a revision, but I an not calling for one other than possibly a 5-7 Bcf base gas to working gas revision as mentioned."

While a number of market experts had been calling for withdrawals in the 59 to 66 Bcf range for the week, a few analysts expected the withdrawal to be a lot smaller. In addition to Cooper's low call, Golden, CO-based Bentek Energy LLC had projected a 10 Bcf overall withdrawal with an 8 Bcf injection in the West, which was right on the money. However, no one expected that the overall report would reveal a net injection.

"The report was certainly bearish and I am a little baffled about the injection," said Tom Saal of Commercial Brokerage Corp. in Miami. "While the weather has been warmer than normal, it sure didn't warrant an injection. What that tells me is there is a lot of demand destruction out there. I don't know that for sure, but it seems to point in that direction. The other answer is that someone goofed, but once again, I don't know that for sure either."

Saal said if futures continue to fall, there are some important support levels to consider. "We've got the $9.40 level very near here. Then you're looking at $9.25, with $9-even resting below that."

Saal, who likens technical analysis to the college football BCS system, suggests objectivity -- and not subjectivity -- is the best analytical tool. "The computer ranking models pick the college BCS football champs again this year. The 'experts' picked Southern California and the computers picked Texas." He urged his clients to "use technical models in your hedge trading strategies and leave the expert opinions to themselves."

If the assertion of one prominent analyst is correct, imploding natural gas prices might have more to do with seasonal factors than the current deluge of warm weather. "Natural-gas prices peak in about the middle of December," said Bill O'Grady, vice president, A.G. Edwards. "That's because once you get past that point you begin to get a better feel for the idea that you're probably going to have enough gas to get through the season."

Speaking prior to Thursday's session, the analyst added that single-digit gas was just around the corner. According to O'Grady, fair value is "between $8 and $10 per million Btu," and "if the weather doesn't get cold soon, then it'll probably be closer to that $8 level."

As for the greater storage picture, working gas in storage stood at 2,641 Bcf as of Dec. 30. Stocks are 79 Bcf less than at the same time last year and 168 Bcf above the five-year average of 2,473 Bcf, according to EIA estimates. While the East region managed a 19 Bcf withdrawal, the Producing and West regions put 12 Bcf and 8 Bcf, respectively, into the ground for the week.

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