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Stout 168 Bcf Withdrawal Pushes Futures Temporarily Higher

Coming in on the high side of most industry expectations, the 168 Bcf net storage withdrawal in the Energy Information Administration's (EIA) storage report for the cold and blustery week that ended Dec. 8 resulted in a spike in January natural gas futures Thursday to a high of $7.910. However, a short jolt was all the report provided as the prompt month sunk lower for a majority of the session, recording a low of $7.530 before settling at $7.555, down 11.8 cents on the day.

With the storage report in their back pockets, market bulls still were unable to build on Wednesday's 24.3-cent gain because the weather picture through December still appears to be bearish.

After opening Thursday's regular session at $7.700, the prompt-month inched higher to record a $7.750 tick just prior to the storage report's release. Immediately following the bullish report, traders pushed the January contract higher to trade at $7.910 before backing off a bit and taking stock of the situation.

"The storage report was bullish for the first 20 minutes," said Tom Saal, a broker with Commercial Brokerage in Miami. "It was a little bit larger than a lot of people were expecting, and I think it reflects the idea of when it's cold, these withdrawals are going to be pretty big. It is just a matter of year-on-year demand increases for natural gas in the winter time when it gets cold. The question is how much more cold is out there and when will it get here?

"Right now, we are going to have a period of some pretty moderate temperatures, so futures should come off," he said. "We could go a little bit higher based off of short-covering, but without that sustained cold weather -- [which] could put together a couple of large withdrawals in a row -- the market still wants to work lower."

However, Saal noted that forecasts have been known to shift, change or be outright wrong. "Everything could change," he noted. "We could come in on Monday and the forecast for the following week could change to show below-normal temperatures. You have to remember that it is a dynamic process."

Saal added that Thursday's trade action "wasn't real bullish" to say the least. "Although we still have plenty of time left in winter, we also have plenty of gas left in storage," he said. "It really is time versus inventory. The further we get into winter with moderate temps, the less fear about low supplies there is."

According to a Reuters survey of 21 estimates, industry players expected storage inventories to fall by 150 Bcf with a range of expectations running from a 130 Bcf withdrawal to 178 Bcf. The ICAP storage options auction Wednesday resulted in an expected weekly storage withdrawal of 159.2 Bcf.

The 168 Bcf withdrawal was surprisingly much closer to last year's mammoth 182 Bcf pull than the five-year average pull of 110 Bcf.

As of Dec. 8, working gas in storage stood at 3,238 Bcf, according to EIA estimates. Even with the significant withdrawal, stocks were 245 Bcf higher than the same time last year and 225 Bcf above the five-year average of 3,013 Bcf.

The East region saw 93 Bcf removed for the week, while the Producing and West regions withdrew 55 Bcf and 20 Bcf, respectively.

Despite the futures market's weakness, some traders say that during this time of year the risk environment is still of higher prices. "The risk is still to the upside. Lower prices would be welcome except for those who bought at Index," said a California risk manager.

He said that he thought the market was stuck in a trading range, and his trading had been confined to selling the "wings." By selling call options and put options far out of the money, i.e. at strike prices well above and below current market prices, he was able to capture the premium on both the sale of call options and put options. The risk to the trade is if the market breaks out of its current range and forces the exercise of either the call or put options presumed to be out of the money. "Anything under $7 in put options and over $10 in call options, should be effective," the risk manager added.

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