Near-month natural gas futures went in search of lower price levels Thursday morning following news from the Energy Information Administration (EIA) that 138 Bcf was withdrawn from natural gas storage for the week ending Jan. 7. The storage report, which was "bearish" compared to most industry expectations, combined with freshly updated weather forecasts for slightly less chilly temps later this month, pushed February futures on Thursday to a low of $4.382 and a close at $4.407, down 12.4 cents from Wednesday's finish.
Ahead of the 10:30 a.m. EST report, February natural gas was trading at $4.491, but in the minutes that immediately followed, the contract sank to $4.382, possibly due to the fact that the withdrawal fell well short of last year's mammoth date-adjusted 251 Bcf draw for the week. From there, the prompt-month contract moved back into the mid-$4.40s before inching lower to close.
Citi Futures Perspective analyst Tim Evans deemed the report "bearish compared to consensus expectations," but he warned that the supply-demand equation is becoming tighter.
"The 138 Bcf in storage withdrawals for last week was below consensus expectations for a 142-145 Bcf draw, but this was still a constructive figure in our view, beating the 108 Bcf five-year average by a comfortable margin and reducing the year-on-five-year average surplus to 161 Bcf," Evans said. "Coupled with today's more moderate temperature outlook, we don't see the market as likely to avoid a downside test, but the falling storage surplus nonetheless confirms that the market continues to become tighter physically."
Going into the report, industry withdrawal estimates ranged from the mid-130s Bcf to nearly 150 Bcf. Evans had been expecting a 136 Bcf withdrawal, while Bentek Energy was projecting a 148 Bcf withdrawal.
As of Jan. 7, working gas in storage stood at 2,959 Bcf, according to EIA estimates. Stocks are now 69 Bcf higher than last year at this time but only 161 Bcf above the five-year average of 2,798 Bcf. For the week the East Region led the charge by removing 80 Bcf, while the West and Producing regions pulled 38 Bcf and 20 Bcf, respectively.
In addition to the storage number, traders were also factoring in disparate weather forecasts calling for late-month moderation.
Overnight weather model runs show that the last week in January may offer some reprieve from the arctic juggernaut that continues to bombard eastern and Midwest energy markets. "General agreement continues that we are heading toward a milder North American pattern by the end of January, but how fast and how strong continue to be big questions that the models are clearly not handling very well," said Matt Rogers, president of Commodity Weather Group in Bethesda, MD. "The European operational model dropped a very strong cold outbreak into the Midwest and East late in the six-10 day period, presumably the last shot before the moderation. Otherwise, the other models were more modest with the cold potential. The American models are fastest/strongest with the warming in the 11-15 day. We favored the more gradual, less intense warming on the European models."
Systematic traders using pattern recognition techniques suggest that the market may generate a sell signal, though possibly from higher levels. Their models are currently flat the market and they hope that the same pattern, which yielded a successful buy signal following the mid-December January futures 24-cent plunge, will be replicated as a sell signal in the near future.
"It may take another week or two before the signal surfaces, and my thoughts are that it would originate from a price higher than where we are currently. If the market makes a sharp move up, that would generate a sell," said a Texas fund trader.
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