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After Shrugging Off Withdrawal, Futures Push Higher Anyway

Despite seeing an earlier than normal withdrawal from storage, traders on Thursday pushed December natural gas futures lower in morning trade. However, after bouncing off of support, the prompt month pushed higher to finish the day at $7.814, up 10.2 cents from Wednesday.

While the Energy Information Administration (EIA) reported a 9 Bcf drop in underground stores for the week ended Oct. 27, many in the industry seemed to have had a larger withdrawal in mind as natural gas futures sunk lower on the report's release. After trading lower in the overnight Globex session, December natural gas sank lower to put in a low of $7.400 shortly after the report's release. The prompt-month pushed higher from there, recording a high of $8.020 in afternoon trade before settlement.

One broker noted that the market's recent behavior is following an almost textbook Elliot Wave pattern. A typical Elliot five wave pattern assumes three waves, one, three and five in the dominant direction -- upwards in this case -- punctuated with waves two and four in the opposite direction.

"We think this is really tracing out a very orderly Elliot Wave five-wave advance," said a Washington, DC-based broker. "We were in a four wave correction that bottomed out at $7.060 in overnight Globex trading Tuesday night. A four wave retracement is normally around a 38.2% retracement of the three wave and that $7.060 low came within a couple of pennies of that, by our calculations."

He noted that the $7.40 low from Thursday and Monday were also significant. "I was talking to a floor trader and asked him if the up move Thursday afternoon was just short-covering or fresh buying," the broker said. "He responded that when we got down around $7.40 that was short-covering but after that it was fresh buying. much like the action on Monday when we put in a low of $7.40 but held up. The fact that we dipped down into that $7.40 zone again Thursday and rallied showed that whoever it was that was doing that buying down there earlier in the week was defending that price again and maybe adding in as opposed to liquidating."

As for where the market is headed in the near- to intermediate-term, the broker said it could go another dollar or so higher. "We expect to make a new high on this fifth wave up to as high as $9.24," he said. "Stranger things have happened and it really is not that far away especially for the natural gas market. So I think we have one last thrust up to go here before we see a more meaningful correction."

As for the morning's dip lower, Commercial Brokerage Corp.'s Tom Saal said a couple of things allowed the prompt-month to search lower. "I think we saw the effect of a couple of things impacting the market at the same time Thursday [morning]," Saal said. "The withdrawal was a little lighter than most people were expecting and the forecasts now for next week are for above normal temperatures, so I think the combination of the two helped push the market lower in the morning."

While a Reuters survey of 24 industry players was expecting an average withdrawal of 4 Bcf, the ICAP derivatives auction held Wednesday afternoon showed a consensus 13 Bcf contraction in supplies. Golden, CO-based Bentek Energy was looking for a 13 Bcf withdrawal.

The withdrawal was bullish when compared to historical data for the week. Last year during the same week, a 36 Bcf injection was reported, and the five-year average injection is 30 Bcf.

Following the 9 Bcf withdrawal, working gas in storage totaled 3,452 Bcf as of Oct. 27, according to EIA estimates. However, stocks remained 288 Bcf higher than the same time last year and 276 Bcf above the five-year average of 3,176 Bcf. The West and Producing regions actually injected 1 Bcf and 4 Bcf, respectively, for the week, while the East region withdrew 14 Bcf.

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