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Market Gains Follow Supportive Inventory Stats

June natural gas futures managed to inch higher following the release of mildly supportive inventory figures Thursday. The Energy Information Administration (EIA) reported that 70 Bcf was injected for the week ending May 6, slightly less than consensus estimates closer to 73 Bcf. At the close June had risen 1.3 cents to $4.194 and July gained 1.5 cents to $4.256. June crude oil managed a modest gain of 76 cents to $98.97/bbl. after plunging $5.67 to $98.21/bbl in Wednesday's chaotic oil trading.

Prices at first responded positively. Heading into the 10:30 a.m. EDT report, June natural gas futures were trading at $4.176. Immediately following the report, the prompt-month contract knee-jerked to a high of $4.236 before retreating. As of 11:30 a.m. EDT, June futures were trading at $4.161, down two cents from Wednesday's regular session close.

Going into the report expectations were for a build close to 73 Bcf. The Energy Metro Desk (EMD) weekly survey of 36 traders and analysts revealed a median estimate of 73 Bcf with a range of 60 Bcf to 94 Bcf. EMD editor John Sodergreen predicted an increase of 75 Bcf.

According to EMD, UBS hit the estimate squarely between the eyes. It expected a 70 Bcf injection due to cooler than normal weather. "We estimate inventories increased to 1,827 Bcf, widening the deficit versus 2010 and the five-year average 262 Bcf and 82 Bcf. Last week, weather was 141% and 79% cooler than 2010 and the five-year average, respectively. Since September, heating degree days have been 2% and 4% cooler than the year-ago winter and the five-year average, respectively. We estimate the weather-adjusted S/D [supply demand] balance loosened 1.5 Bcf/d WoW [week on week] for the week ending May 6, and has been 0.5 Bcf/d oversupplied versus the five-year average over the last month. With storage exiting this winter at 1.58 Tcf (in line with the five-year average), we estimate it peaks on October 31 at 3.65 Tcf (0.05 Tcf above normal)," analysts at the bank said.

While noting that Thursday's number could be interpreted as supportive when compared to previous year's builds for the week, Citi Futures Perspective analyst Tim Evans wasn't sure the bulls would get too much mileage out of it.

"The 70 Bcf net injection to storage for last week was inline with market expectations, although supportive for falling shy of the 92 Bcf build from a year ago and the 89 Bcf five-year average," said Evans. "As constructive as it could be considered, however, we note that more neutral to bearish injections are expected going forward and therefore we don't anticipate a sustained push higher."

Industry consultant Bentek Energy utilizing its North American flow model noted in a report that most of the risk to its 73 Bcf prediction was to the upside. "The East [Region] pushed the total injection lower as most facilities in the region reported lower injections week-on-week. Dominion leads the drop with a 2.0 Bcf decrease in inventories or 22%."

Bentek's model showed an injection of 37 Bcf in the East Region, 28 Bcf in the Producing Region and 8 Bcf in the West Region. The actual figures came in at 41 Bcf for the East Region, 22 Bcf for the Producing Region and 7 Bcf for the West Region. The firm sees less gas now but more later.

"Since the injection season started this April, less gas has been going into storage facilities despite all the production growth," Bentek said. "The West [Region] is showing the lower injection rates since 2000 as additional gas is being sent to the Midcontinent where demand remained strong this April due to colder-than-normal temperatures. Overall injection rates are lower across all regions, but they are expected to ramp up in the next month as inventories are projected to reach a new record high by the end of the season."

Evans said prior to the report's release "the below average injections suggest the report could be seen as supportive for prices in economic terms, even if not bullish relative to expectations. However, we anticipate neutral to bearish storage reports to follow."

Looking ahead, Evans sees storage as "near average and putting no particular pressure on prices to trend in either direction. That said, we do see some downside risk that the supply-demand balance could become more bearish once the level of nuclear capacity offline falls back to more normal levels, with pressure on money managers to reduce the speculative long positions shown in the May 3 Commitments of Traders Report. On that basis we see a test of the $4.00 area as likely and with some potential for prices to flush below that mark."

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