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Bears Pounce on Burly Storage Build; Futures Crushed

An already weak natural gas futures market further collapsed on Thursday after the Energy Information Administration (EIA) reported that a whopping 103 Bcf was injected into underground storage for the week ended May 15. The data proved that despite drastic rig reductions, gas is still being stored at a rate that is well above industry expectations. June natural gas futures closed Thursday's regular session at $3.603, down 36.7 cents from Wednesday's finish.

The injection was considerably larger than industry expectations. A Dow Jones survey predicted a build of 94 Bcf, a Bloomberg poll showed a gain of 93 Bcf and Bentek Energy's flow model was indicating a 92 Bcf build. The actual 103 Bcf injection also outclassed last year's 86 Bcf addition and a five-year average build of 90 Bcf. As a result, the market's reaction was swift and furious. Prior to the release of the report June futures were trading at $3.837, but within one minute following the release of the data the June contract had shed 11.9 cents to $3.718. Just prior to closing out the regular session, the contract recorded the day's low at $3.594.

For the moment the recent low futures price of $3.155 is expected to hold, but traders are circumspect after that. "$3 on Nymex should hold, but there are indications that even with wells shut in that gas production is still up over last year, which is a little concern that prices could keep heading lower. There's a lot of gas out there, and even with prices at current levels we have drilling in the Rocky Mountains going on," said a Denver marketer.

"What we need is for demand to pick up. Even with the shut-ins, supply is really outpacing demand right now. But things can change pretty quickly. Look what is happening in the crude. We are finally seeing some demand on that side and it would be nice to see it carry over to natural gas, but we are not seeing it right now."

Even July crude futures showed some weakness after gaining more than $5.04/bbl over the three previous sessions. On Thursday the contract shed 99 cents/bbl to close the day's regular session at $61.05/bbl.

Back in the gas arena, a New York broker noted that all the talk of the last few weeks that the current "bottom" was safe might not be all that smart of a bet anymore. "After we rallied to a high of $4.575, everyone thought it was safe to tag $3.155 as the low for the move in pen, but I long ago learned to only write in pencil when dealing with commodity markets...and especially natural gas," he said. "There is pretty good support between here and there and I still don't think we'll make new lows, but I am less sure than I was a week ago."

Whether prices fall even more is not important to some market experts, who note that any drop in current price levels would be limited and that gas buyers would be silly not to lock in now. Speaking on a GasMart 2009 panel in Chicago on Wednesday, Paul Corby, senior vice president of Planalytics, and Tom Saal, senior vice president of Energy Trading at Hencorp Becstone Futures, told an audience that while they were unsure of when gas prices would move higher in a meaningful way, they did agree that when they do, the market will rocket higher and buyers would be longing for the days when they could have locked in supply in the $3.50-4.50/MMBtu range (see related story).

On the equity markets front analysts were not so pleased with the Thursday morning release of initial jobless claims figures for the week ended May 16. Expectations were for claims to tally 625,000 but the figure came in slightly higher at 631,000. For the prior week 637,000 initial jobless claims were processed by states. A year earlier jobless claims were about 375,000.

Looking more in depth at the country's gas storage situation, the 103 Bcf build report Thursday brings working gas in storage totals to 2,116 Bcf, according to EIA estimates. Stocks are now 514 Bcf higher than last year at this time and 387 Bcf above the five-year average of 1,729 Bcf. For the week, the East region injected 65 Bcf while the Producing and West regions chipped in 25 Bcf and 13 Bcf, respectively.

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