The February natural gas futures contract took a nasty fall on expiration Thursday. Traders noted that a 174 Bcf withdrawal reported by the Energy Information Administration included a 10 Bcf adjustment, thus tempering the amount of gas actually used.

Expectations going into the report centered around 170 Bcf, with a Reuters survey showing a withdrawal of 171 Bcf was expected and industry consultant Bentek Energy calculating a 172 Bcf draw. At the close February lost 17.5 cents to $4.316 and March futures fell 18.2 cents to $4.319. March crude oil stumbled $1.69 to $85.64/bbl.

At first glance the inventory report was right on target. "The EIA number was kind of right in the range. I was hearing a 175 Bcf draw and we came in at 174," said a New York floor trader.

"There are still a number of traders willing to sell this market, and I think you are seeing more shorts initiating positions. To me after looking at the charts and looking at the numbers it looks like we are headed down to the $4 level by mid-next week. The market will likely ultimately head down below $4, but I think we'll get a bounce since there are still six more weeks of winter left but there is so much gas out there people will sell any rallies."

The trader added that his analysis of the March contract showed support at $4.33, $4.24-4.21, and $4.05. "The 50-day moving average for March was $4.375, and since we settled below that, I am looking for the market to come off another 30 cents."

Others see $4 as a viable resting point as well. A California risk manager observed that "the market has a pretty good base at around $4. Investment in drilling and production doesn't make sense below that especially in California where they want to tax every incremental MMBtu."

From a risk management standpoint, he said it made sense to sell put options below the market and collect the premium. "When you are down at these levels, you don't worry too much about prices. Some guys will sell puts just below $4 and collect the premium, for no matter what they still make money using it for power generation."

Market bulls were not as fortunate as their petroleum brethren, who experienced a bearish petroleum inventory report Wednesday but still enjoyed market gains. According to a survey conducted by Bloomberg, expectations for the week ended Jan. 21 were that crude stocks rose by 1.2 million bbl and gasoline inventories added 2.3 million bbl, based on the median estimate of 15 analysts polled. The actual figures came in somewhat higher than expected. Crude stocks gained 4.8 million bbl and gasoline inventories rose 2.4 million bbl. March crude oil, however, gained $1.14 to $87.33/bbl and February RBOB gasoline futures rose almost nine cents to $243.06/gal.

In spite of the day's decline analysts see the fact that Thursday's withdrawal report will place natural gas inventories close to the five-year average as supportive. "This tightening may not be sufficiently shocking to drive the market higher in dynamic fashion, but we do view it as upward fundamental pressure, with the lower storage level leaving the market more vulnerable to any further cold that happens along over the balance of the winter," said Tim Evans, an energy analyst with Citi Futures Perspective.

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