The bullish natural gas futures case suffered yet another bearish fundamental body blow on Thursday as the Energy Information Administration (EIA) reported that 110 Bcf was injected into underground storage for the week ended June 1. While July natural gas futures bulls put up a good fight in morning trade, the contract ended up dropping 25.5 cents Thursday to close at $7.825.

After trading as high as $8.115 in morning trade, the July contract was down at $7.990 20 minutes after the 10:30 a.m. EDT report. However, following a small rebound, the contract really began to fall just before noon EDT.

While the 110 Bcf build came in only slightly above most industry expectations, it was well above last year's 77 Bcf injection and just above the five-year average build of 99 Bcf. With every significant injection, current storage levels continue to close the deficit to last year's levels, which are referred to by the industry as abnormally high.

Last year's quick storage refill was seen as an anomaly, but last year's injection season also featured withdrawals during the summer, which is also highly unusual. Some traders believe that last summer's withdrawals could explain why the futures price level is remaining fairly lofty in the face of continually bearish storage statistics. For the weeks ended July 21, 2006 and Aug. 4, 2006, 7 Bcf and 12 Bcf were withdrawn from underground storage due to heat. The five-year averages for those weeks at the time were injections of 65 Bcf and 61 Bcf, respectively (see Daily GPI, June 6).

"Even with the big injections, traders still have their eye on last year's withdrawals during the season," said Tom Saal with Commercial Brokerage Corp. in Miami. "I think the market is not quite ready to make a big move in either direction because we do have a little bit of conflicting fundamentals here. We have the big injections, which should be kind of bearish, but we still have the potential for a hot summer and active hurricane season in front of us. We are really just treading water here."

Saal said natural gas futures are still range-trading and he expects a test of support down near $7.700 in the next few days. "Once this thing starts to break down, it will move lower to support levels," he said.

"I think seeing some withdrawal this summer is a possibility," said a Washington, DC-based broker. "The economy keeps growing. As more and more power generation goes gas-fired we might have the possibility of withdrawals during the summer when we are expecting injections."

Commenting on the day's squirrelly activity, the broker had no real explanation other than range-trading. "The break down in prices occurred well after the storage number was out, so I am not sure what that was all about," he said. "We sold off right when the number came out, steadied ourselves and moved back up, but then collapsed right around 11:25 a.m. It was a long slide from there. That big drop took the contract from $8.040 to $7.820 as stops kept going off on the move lower. As to what sparked it, I'm not so sure. It appears we are heating back up weather-wise and might start picking up some air conditioning load, so I did not see the need for a 20-plus cent sell-off."

Being on either side of this market hasn't been a cake-walk recently. "Being long isn't helping, but being short isn't any better," the broker said. "If you keep selling this thing thinking it is going to break $7.700 and make a run for the low $7s, nope, it runs right back up to $8.200 on you. We are just caught in a Chinese water torture device here."

Despite the day's trade, the broker said the risk is still of a breakout to the upside. "We have a trend-following model that is getting whipsawed back and forth. Every time I am on the short side, I find that I don't want to be in that position but you have to take your signals when they come. When I get long on days like yesterday, it's a good thing, but then we have days like this. Is the market unaware that we have La Nina in effect and have already had one storm in the Gulf?"

As of June 1, working gas in storage stood at 2,163 Bcf, according to EIA estimates. Stocks are now 146 Bcf less than last year at this time and 366 Bcf above the five-year average of 1,797 Bcf. The East region injected 66 Bcf for the week and the Producing and West regions chipped in 28 Bcf and 16 Bcf, respectively.

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