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Futures Drop in Afternoon Trade Following 49 Bcf Pull

After trading lower in the overnight Globex session in anticipation of a bearish storage withdrawal, natural gas futures traders were already well prepared when the Energy Information Administration (EIA) reported that 49 Bcf was removed from underground storage for the week ended Jan. 5. After almost no reaction on the report's 10:30 a.m. EST release, the February natural gas futures contract plummeted in afternoon trade, recording a low of $6.250 before settling at $6.292, down 46.3 cents on the day.

The drop Thursday was in stark contrast to the rest of the week's activity. In fact, the 46.3-cent drop nearly erased the 57.1-cent gain from the first three trading days of the week.

After continuing to trade lower on Thursday morning to $6.520, the February contract recorded a $6.500 trade immediately following the 10:30 a.m. EST storage report, before staging a rebound to $6.665. However, selling dominated the afternoon.

"A 49 Bcf withdrawal is what the market was expecting with continued weakness stemming from mild temperatures, and with [the National Oceanic and Atmospheric Administration (NOAA)] coming out predicting much the same (above-normal) through March (not helping)," said Jay Levine, a broker with enerjay LLC. "Reversals are still evident and should be expected given the unpredictability of both the weather and the market, even if the course seems clear."

Overhanging the release of the storage data is what could be a market altering event in the form of massive cold air presently heading south from Canada. It is forecast to reach Midwest and eastern energy markets next week.

AccuWeather was predicting a high Thursday of three degrees below zero for Cut Bank, MT, just over the Canadian border, a high of 13 degrees Friday for Denver, and by Monday Chicago is expected to shiver as temperatures reach no higher than 26 degrees. On Monday, AccuWeather's Joe Bastardi said he believes that if the weather pattern reaches its full potential, the dramatic change from warmth to cold could result in "one of the top-five coldest 30-day stretches in the past half century" (see Daily GPI, Jan. 11).

Temperature forecasts for the Windy City have been tweaked a little, however. Meteorologist Tom Skilling at WGN-TV in Chicago forecast Wednesday that the Monday high would reach just 18 degrees. His most recent forecast shows a Monday high of 27 degrees.

"There was a little bit of dynamism to natural gas futures trading on the day," said a Washington, DC-based broker. "We bounced around in the morning surrounding the storage report, but activity dried up around lunch time and then in the afternoon everyone sold the heck out of the thing. I have not heard any specific trading action, but part of it might have been Skilling's weather forecast, which raised estimates for just how cold it was likely going to get in Chicago. That could have been all it needed.

"Despite Thursday's wipe-out, I still am hanging on to a very slim bullish bias, but I won't be bullish much longer," he added. "If we are down on the open tomorrow, my system will probably switch over and be bearish again. The $6.10 to $6.12 area is critical. If we get below that, then I think we will make a beeline down to $5.950 and try to retest that low."

While the 49 Bcf withdrawal was what the industry had been expecting, the number fell between last year's date adjusted 17 Bcf withdrawal and the five-year average pull of 102 Bcf.

Most industry estimates were looking for a withdrawal in the 40-55 Bcf area. A Reuters survey of 22 estimates expected a median drawdown of 45 Bcf, while the ICAP storage options auction on Wednesday produced a 52 Bcf withdrawal expectation. Golden, CO-based Bentek Energy's Flow Model and Daily Supply/Demand Balance Model both came up with 53 Bcf withdrawal expectations.

As of Jan. 5, working gas in storage stood at 3,025 Bcf, according to EIA estimates. Stocks are still 401 Bcf higher than last year at this time and 461 Bcf above the five-year average of 2,564 Bcf. The East region withdrew 28 Bcf, while the West region and Producing region removed 12 Bcf and 9 Bcf, respectively.

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