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Futures See Delayed Jump Following Largest Storage Pull of the Year

Traders watched in awe Thursday morning as the sizeable year-over-year storage surplus, which stood at 400+ Bcf just four short weeks ago, switched to a 26 Bcf deficit following the Energy Information Administration's (EIA) 224 Bcf withdrawal report for the week ended Feb. 2. Although trading a fairly tight range, March natural gas futures zig-zagged on Thursday, putting in a low of $7.710 and a high of $7.935 before settling at $7.871, up 16.2 cents from Wednesday.

Despite coming in a little more than most industry estimates and much more than historical comparisons, the 224 Bcf withdrawal, which was by far the largest withdrawal of the season and the only withdrawal north of 200 Bcf, did not impress most natural gas futures traders initially. After trading at $7.775 just prior to the 10:30 a.m. EST report, March natural gas futures rose to $7.860 after the report but then moved lower. After dropping to $7.710 just prior to 1:30 p.m., the prompt month soared higher to notch a $7.935 high just prior to closing.

"We definitely stalled out in the $7.70s this morning following the report," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "Going off of the current weather outlook, I still think $8 is a brick wall. I think the market's perception of the weather situation is that the cold will only stick around another week or so. The market took a big punch with the cold weather, but we had enough inventory to handle it. Prices firmed up, but the world is not coming to an end. Now, if the cold weather persists into calendar March, then I think we probably have something else to talk about."

Jay Levine, a broker with enerjay LLC, said that the 224 Bcf withdrawal, which was "in-line with expectations," caught the market off-guard initially "like a deer caught in the headlights." He added that with the current cold weather on tap, the next few weeks "will very likely show similar -- larger year-over-year -- draws, leaving storage not quite as 'full' as previously anticipated."

Levine pointed out that the storage report for the week ended Feb. 9 will definitely be one to watch. "With eyes already on the coming week's storage reports; next week should be a [doozie]..." He added that "it's no surprise to me that the market is trading in a more erratic if capricious manner even if the complex is still trading within a fairly narrow band."

With extremely cold temperatures in a number of high gas-demand regions last week, most withdrawal estimates for Thursday's storage report were north of 200 Bcf. The 224 Bcf withdrawal was significantly larger than both last year's 46 Bcf pull and the five-year average draw of 148 Bcf. A Reuters survey of 22 industry players produced a range of withdrawal expectations from 198 Bcf to 240 Bcf with an average pull expectation of 218 Bcf. A Bloomberg survey of 18 industry observers also found that a 218 Bcf withdrawal estimate was the median of its sample. The ICAP storage options auction Wednesday revealed a 216 Bcf withdrawal expectation. Golden, CO-based Bentek Energy said it was expecting a 214 Bcf withdrawal utilizing its Flow Model methodology, and a 215 Bcf pull utilizing its Supply/Demand Balance methodology.

As of Feb. 2, working gas in storage stood at 2,347 Bcf, according to EIA estimates. Following the mammoth withdrawal, stocks were 26 Bcf less than the same time last year and 378 Bcf above the five-year average of 1,969 Bcf. The East region dropped 139 Bcf during the week, while the Producing and West regions declined by 63 Bcf and 22 Bcf, respectively.

Looking at the storage report solely based on a weather basis, the withdrawal of over 200 Bcf was consistent with the prior week's 186 Bcf decline. For the week ended Jan. 27, the National Weather Service reported a nationwide heating degree day (HDD) tally of 210, or three more than normal. For the week ended Feb. 3, 239 HDD were recorded, or 37 more than normal. Next week's draw could be just as steep or steeper. For the week ended Feb. 10, the NWS predicts a tally of 232 HDD, or 38 more than normal.

Cold weather notwithstanding, veteran observers suggest the end is in sight to the recent advance, which has seen March futures stall at highs in the $7.90s ."There have to be a number of disappointed bulls who bought into the weather forecasts, and wonder what is happening and why haven't prices advanced," said Walter Zimmerman of United Energy.

According to Zimmerman's analysis, rallies in natural gas prices during February have only occurred three times since futures started trading in 1990. "Natural gas, crude oil and gasoline are all in the same boat where a strong January is typically not followed by a strong February. Anyone who has looked at the history has got to see some problems," he noted.

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