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Futures Gain 9 Cents Despite Plenty of Storage

The Energy Information Administration (EIA) reported an 89 Bcf storage withdrawal for the week ended Jan. 12, which was on the high side of industry expectations, well above last year's 42 Bcf pull, but well below the five-year average draw of 119 Bcf. Natural gas futures traders were not too concerned as the February contract traded in a 23-cent range before settling at $6.324, up 9 cents on the day.

After trading near $6.320 early on Thursday morning, February natural gas futures bumped to the day's high of $6.380 following the storage number's 10:30 a.m. EST release. After putting in a low for the day of $6.150 at 11:25 a.m. EST, the prompt-month rebounded.

The big action on the day occurred in the crude futures pit where February crude prices reached 20-month lows following a report that showed a larger than expected addition to U.S. crude inventories last week. The front month tracked below $50 a barrel to record a low of $49.90/bbl before ultimately closing at $50.48/bbl, down $1.76 on the day. Front-month crude has not traded lower since May 2005.

The amount of gas in storage remains well above historical comparisons, but the 89 Bcf pull was a little bit more than the consensus opinion. "I thought the withdrawal report was supportive [of natural gas futures]. It was bigger than a number of people expected," said Tim Evans, an analyst with Citigroup in New York. "It suggests we are using a little more gas at a baseline consumption level than we have been in the prior weeks. Because it was larger than expected during a fairly moderate temperature week, it probably implies that the net withdrawals for this week and next week will be somewhat larger than first expected as well. There is a little bit of a knock-on effect here as we move forward."

As for futures prices, Evans told NGI that the short-term will likely stand in contrast to the intermediate-term to long-term outlook. "While we have some cold directly in front of us, we also still have a very high level of storage and the longer range forecasts from the National Weather Service still look bearish on balance, with the Midwest looking warmer than normal," he said. "So it would not appear that we are on the doomsday cold scenario for the rest of the winter.

"Over the intermediate-term to longer-term, I say futures will head lower," Evans added. "By mid-February I think we will be breaking into new low ground. Where we go between now and then is really the interesting question. We could very well see a pop to the upside on a storage withdrawal that could be in the 200 Bcf range, so it is going to be hard for the market to go down in the next couple of weeks. We could see a pop to $7 or more on this current cold weather pattern. The window remains open to the upside until we get past this cold snap."

Ritterbusch and Associates' Jim Ritterbusch had been expecting a draw of 71 Bcf and said that "a decline of more than 90-95 Bcf [would] be required to spur any significant support ...and any subsequent price rally of more than 10 cents will likely be met by heavy sales." He noted that the week's cold has been unable to lift cash market prices as well.

If National Weather Service predictions are correct, an incursion of mild air next week may take some of the luster off the bulls' case. In its most recent six- to 10-day forecast covering Jan. 24-28, a lobe of warm air is predicted to invade the northern plains and work its way south. The above-normal influx includes the entire West Coast and all of Washington state before arcing down to just shy of North Texas and swinging back up to northern Wisconsin. However, a broad swath of the southern and eastern U.S. is expected to experience below normal temperatures.

Ritterbusch suggests the "$6.20 level is looking increasingly vulnerable and we would not rule out a test of the $6.00 area by Friday if warmer temperature forecasts become more prevalent. We still view an eventual price floor as existing at about the $5.75 area with a test of this level developing by next week."

Most within the industry had been expecting a withdrawal within the low 70s Bcf to high 80s Bcf range. A Reuters survey of 18 industry players was looking for a median draw of 83 Bcf, while the ICAP storage options auction held Wednesday afternoon produced an 80.5 Bcf withdrawal expectation.

As of Jan. 12, working gas in storage dropped below 3 Tcf to 2,936 Bcf, according to EIA estimates. Stocks are still 354 Bcf higher than last year at this time and 491 Bcf above the five-year average of 2,445 Bcf. The report included a 52 Bcf draw in the East region, a 20 Bcf draw in the Producing region and a 17 Bcf draw in the West region.

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