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Futures Drop Below $8 Before Afternoon Rally on Short-Covering

Breaking its range of the last 12 sessions, February natural gas futures opened Thursday at $8 and worked itself even lower in anticipation of yet another bearish natural gas storage withdrawal report. Following almost no reaction to the 81 Bcf pull from storage, prompt-month natural gas pushed back above $8 to settle at $8.229, down 23.1 cents from Wednesday's close.

The Energy Information Administration (EIA) reported Thursday morning that 81 Bcf was removed from underground stores for the week ended Jan. 20. While the withdrawal was within the industry consensus, it paled in comparison with historical analogs.

Prior to the report's 10:30 a.m. EST release, prompt month futures probed lower, reaching a pre-report low of $7.800. In the minutes immediately following the report, February natural gas carved out a morning low of $7.750. However, February natural gas, which expires Friday afternoon, climbed higher for the remainder of the session before closing. The last time a prompt month traded lower than $7.750 was on July 29, 2005, when the September 05 contract hit a low on the day of $7.701.

"The storage number came in right with expectations," said Ed Kennedy of Commercial Brokerage Corp. in Miami, adding "there really was no surprise there. It is also no shock that there is a lot of gas in the ground and we are already halfway through the heating season."

As for how the February contract was expected to expire Friday, Kennedy said Thursday morning that it would likely terminate near current levels. "The cash market is trading right at $7.91 and the weather is not supposed to get much colder in the next 24 hours, so I think February futures could go off the board between $7.80 and $8.00."

Rafferty Technical Research broker Steve Blair said the market's activity Thursday wasn't a shock. "I am not surprised that we broke below the $8 level only to rebound in the afternoon," said Blair. "As I have been saying, we were destined to break below $8 barring a change in weather."

As for the late rally, Blair said he didn't think any single particular sector of the market was responsible. "I think there are a lot of people who just continue to sell into this market. The action Thursday was based solely on weather because the 81 Bcf withdrawal was slightly larger than expectations, yet there was no bounce in morning trade."

Blair noted that futures continue to hit some technical numbers on its way down. "The fact that we convincingly broke below $8 but came back in a big way says to me that a lot of short-covering was coming in. I don't think it's any big turnaround in the market." He added that with February options expiring Thursday, a lot of calls appeared to have been taken out of the market. "You have a lot of calls that people were expecting to exercise into a profitable futures position, but they ended up out of the money. There are a lot of puts that are now in the money as a result."

Taking into account the expiration of February futures on Friday along with temperatures back in the 50s over the weekend in some areas, Blair said he just doesn't see any big moves to the upside gaining any traction. "Any big move to the upside is likely to be met with people selling into it," he said.

Calling the withdrawal and the market's response pretty closely was Jim Ritterbusch of Ritterbusch and Associates, who was on the record for a withdrawal reaching 80 Bcf. "The dynamic of this expansion in the supply surplus will tend to limit further upside price possibilities and sharply increases the odds of another breakdown to fresh lows," he said Thursday morning prior to the report. "Such a large increase in the current supply surplus will make it very difficult for prices to rise unless "cooler (weather) patterns deviate sharply from normal."

Golden, CO-based Bentek Energy said it expected a 73 Bcf withdrawal, while Wednesday afternoon's ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, zeroed in on a 76.5 Bcf withdrawal for the week. The actual 81 Bcf pull was minuscule when compared to last year's 213 Bcf withdrawal and the five-year average withdrawal of 165 Bcf.

As of Jan. 20, working gas in storage stood at 2,494 Bcf, according to EIA estimates. Stocks were 191 Bcf higher than the same time last year and 445 Bcf above the five-year average of 2,049 Bcf. The East region led the withdrawal charge with a 56 Bcf pull, while the Producing and West regions extracted 13 Bcf and 12 Bcf, respectively.

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