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Downward Futures Pressure Continues Following 85 Bcf Withdrawal

Proving that the previous week's significant 171 Bcf withdrawal report was a one-time wonder, the Energy Information Administration (EIA) reported Thursday morning that 85 Bcf was removed from underground stores for the week ended March 3. With the gas storage surplus already factored into prices, April natural gas futures traded in a 24-cent range Thursday, settling at $6.601, down 4.7 cents.

Estimates for the storage report had been mostly within a 91-110 Bcf range, so the 85 Bcf pull came in slightly smaller than expected. However, the number was well below last year's 134 Bcf pull and the five-year average withdrawal of 108 Bcf, which only added to the already large storage surplus.

Classifying the report as fairly bearish, traders pushed the futures prompt month lower in a knee-jerk reaction immediately following the report. After recording a low for the day at $6.480, the prompt month rallied back, putting in a high of $6.720 before easing towards the close.

Jay Levine, a broker with enerjay LLC, said the 85 Bcf withdrawal was "surprisingly" low. "That doesn't bode so well for a market already under pressure, but then we all know that..., and they don't call it futures for nothing." Levine wondered how much of all this bearish news has already been incorporated into prices, More importantly, he said it is still open for debate as to how much more prices can suffer.

Commercial Brokerage Corp. broker Ed Kennedy said, "The storage report has been meaningless for a number of weeks now. We are going to end the withdrawal season with a lot of gas in storage. You have to remember we are trading April futures, not March. We are not going anywhere from what I can see. There is good buying under the market and there is no reason for it to rally just yet, so we will likely have this extended sideways pattern for a while. Talking to the floor Thursday, word is there is no follow-through."

Reiterating previous advice, Kennedy said the April-October (injection strip) is what people should be looking at. "It went out Thursday around $7.15. I doubt it will get much below $7, so there are only dimes to the downside.

Kennedy said he thinks the key right now is options. "We've had this really high implied volatility -- ergo very expensive options here for the entire winter," he said. "They have just creamed the implied volatility. The summer months are now running around 48%. Anything down there in the 40s means the options are cheap. Why play games? The market could go higher or lower, but I would just lock in the summer months using calls."

While the storage report Thursday was considered bearish, nobody expected a repeat of the Feb. 24 report, which showed that 171 Bcf was removed from underground storage. According to a Reuters survey of 23 industry players, Thursday's report was expected to reveal a 110 Bcf withdrawal. Coming in a little lower with its projection, Golden, CO-based Bentek Energy expected a storage withdrawal of 91 Bcf. Wednesday afternoon's ICAP-Nymex storage options auction was calling for a 94.3 Bcf withdrawal for the week.

"While a late-winter cold snap or cool spring could whittle down some of the storage surplus, it is probably too late to prevent stocks from ending the heating season at record-high levels," Fimat analyst Michael Fitzpatrick said.

As of March 3, working gas in storage totaled 1,887 Bcf, according to EIA estimates. Working gas levels were 393 Bcf higher than the same time last year and 664 Bcf above the five-year average of 1,223 Bcf.

The East region led the withdrawal charge by removing 77 Bcf from underground stores, while the West region pulled 9 Bcf and the Producing region actually ended up injecting 1 Bcf.

Short-term weather appears problematical for the bulls. AccuWeather.com says that spring-like weather will prevail across the eastern half of the nation with warm air across the South and mild air across the Northeast. "The warm, moist air flowing northward will help to trigger showers and a few thunderstorms as low pressure systems develop in the nation's midsection and move up through the Great Lakes region," said Jon Mabry, AccuWeather meteorologist.

In other news, the New York Mercantile Exchange (Nymex) announced Wednesday that its Access trading hours for the Nymex Division will end at 9:50 a.m. EST from Monday through Friday, instead of at 9:30 a.m., beginning March 13.

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