April natural gas futures jumped higher Thursday following the release of government inventory data. The Energy Information Administration reported that for the week ended March 11, 56 Bcf was withdrawn from storage, above what the market was looking for. At the close April was up 22.0 cents to $4.158 and May advanced 22.4 cents to $4.234. April crude oil jumped $3.44 to $101.42/bbl.
Although the 56 Bcf withdrawal was outside the range of most traders' expectations, it was initially not seen as that significant. "Everyone was looking for a number of 40 to 45 Bcf and nobody, I mean nobody, called anything above 47," said a New York floor trader.
Soon after the figure was released the trader was thinking the early gains gave the bears an opportunity to re-establish short positions. "Today is a prime example that we should be screaming through the roof and we [were] not. We made a high of $4.10 a week ago and prices just came off from there. Watch, we trade up around here [$4.08] for a while, get down to $4.05 and before you know it we'll be down in the mid $3.90s again," he said shortly after the data was released.
$4.05 never came and the market eventually did "scream" higher and not only surpassed the trader's estimate, but reached a new trading range. "You need a settlement above $4.125 in order for this thing to significantly move," he said.
Fundamentals analysts see the argument for an undervalued market gaining some traction. "The net withdrawal of 56 Bcf was a clear bullish miss compared with consensus expectations and close to the five-year average rate," said Tim Evans, analyst with Citi Futures Perspective in New York. "Storage is now 31 Bcf lower than a year ago and just 2 Bcf above the five-year average. In our view, this adds to the case that natural gas is at least somewhat undervalued relative to its storage level."
Others see the beginnings of a market advance. "I think we have stage one. We are in liftoff," said Tom Saal, vice president at Hencorp Futures in Miami.
Saal envisions an erratic move higher. "We will probably go up a little bit, back off, then a little higher, and then the news reports will say there is no reason to rally. All the doubters have to lose money, and by the time they come around, we will be at $5," he mused.
Saal is a student of the Market Profile, a technique of analysis and trading developed by legendary grain trader Peter Steidlmayer of Chicago, and in Saal's view the important factor is the amount of "horizontalness" the natural gas market has displayed as it was confined to a trading range from the $3.70s to as high as the upper $4 area.
In his view the market consists of periods of vertical movement; in the case of natural gas it was a long period of decline that was followed by the recent span of horizontalness, "and today we are seeing 'verticalness.' What you look for in that period of horizontalness are day structures and weekly structures that confirm the horizontalness as well as the horizontalness itself," he said.
"We had 46 TPO's [time price opportunities] going sideways and that is huge. The market in all of its glory and all of its bearishness, and the funds throwing everything at it but the kitchen sink couldn't push it any lower than $3.80," Saal said.
When queried how much of a rise the market could experience from this period of horizontalness, Saal was noncommittal about any long-term objective. "I do have some value areas at higher levels, but trying to measure how high the market may move off this extended period of horizontal movement is not useful; $4.30 is the next major value area [objective], and I have spoken with other technicians who feel that is where the market is headed as well."
With the heating season winding down, traders got something of a look at just how strong U.S. production is and what the upcoming injection season may be like. Robust production, particularly from shale basins in Pennsylvania, Texas and Louisiana, may start to impact the injection patterns as heating requirements diminish.
For the moment the stout withdrawal seems to be indicating that production may not be as strong as originally thought. Industry consultant Bentek Energy, utilizing its North American flow model, had predicted a withdrawal of 45 Bcf, with the East Region pulling 44 Bcf; the West, 3 Bcf; and the Producing Region adding 2 Bcf. Bentek said it "expects a third week of injections in the Producing Region despite some slightly cooler weather in the area. The East and Producing regions are expected to post their first relatively small withdrawals of 2011 this week after demand plummeted in both regions. Last year, this was the final week of withdrawals for the West."
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