On a jam-packed information day for U.S. natural gas, traders were dealt two bearish reports on Thursday, which ended up sinking June natural gas futures back below $4.
Traders received a rare double dose of supply data Thursday. In addition to the Energy Information Administration (EIA) storage report of a larger than expected 83 Bcf build for the week ending April 23, traders were forced to digest the EIA’s announcement of February 2010 production estimates, which included recalculations for all of 2009 using a new methodology (see Daily GPI, April 27). While expectations were for a significant downward revision (see Daily GPI, April 29), the actual revision came in smaller than most had expected (see related story).
Heading into the 10:30 a.m. EDT storage report, the June natural gas futures contract — in its first regular session action as the front month — was trading at $4.270. Immediately following the storage report release, the contract dropped to $4.038. After the release of the production revision, June futures reached a low of $3.967 before closing the day at $3.980, down 36.8 cents from Wednesday’s finish.
Expecting a 55 Bcf build, Citi Futures Perspective analyst Tim Evans called the actual injection “bearish,” but he noted the week-to-week switches from bullish to bearish and back again confuses things a bit.
“The 83 Bcf net injection to U.S. natural gas storage was at the top end of the range of expectations and over the 67 Bcf five-year average as well, a clearly bearish report,” he said. “Perhaps the only mitigating factor is that we’ve been seeing some oscillation from week to week — bearish data one week followed by bullish the next — and so last week’s apparent surplus might overstate the case. However, this report puts clear downward pressure on prices.”
Heading into the report’s release, Kyle Cooper of IAF Advisors in Houston expected a build of 77 Bcf, while a Reuters survey of 25 industry players produced a 55 Bcf to 80 Bcf range of injection estimates with an average expectation that storage supplies will grow by 70 Bcf. In addition to outpacing the five-year average injection, last week’s 83 Bcf build was just larger than last year’s 77 Bcf build for the similar week.
According to the EIA, working gas in storage stood at 1,912 Bcf as of April 23. Stocks are now 101 Bcf higher than last year at this time and 303 Bcf above the five-year average of 1,609 Bcf. For the week the East Region injected 38 Bcf and the Producing Region added 31 Bcf while the West Region chipped in 14 Bcf.
As for the EIA’s production revision, market watchers were unimpressed.
“Heading into Thursday’s trade, the market was setting itself up for a volatile day due to the storage report and the EIA-914 production data revision,” said Gene McGillian, a broker at Tradition Energy. “At the end of the day, I think the plunge in prices was more attributable to the large storage injection than the production revision. The storage number dropped front-month futures values down to $4.030 and the when the production revision hit we dropped another six cents or so. No doubt there was some anxiety in the market over the revision because the EIA a month ago was talking about a ‘significant’ downward reduction.
“I think the market keyed on the fact that we pushed storage levels to basically a record level for the third week of April,” McGillian told NGI. “With an unsupportive weather picture, the market gave back its recent gains in two or three minutes of trading. Thursday’s action also confirms that $4 is a magnet level for gas, but I don’t think we can rule out a test of this year’s lows down at $3.810.”
The broker noted that Thursday’s drop highlighted the weak underlying fundamental picture that the gas market is dealing with. “It also shows that the rallies are currently not sustainable. On the other side of the coin, the window to trade below $3.810 is closing here as summer heat and the hurricane season are right around the corner. If we do manage to break that level and get to the mid-$3s, it will be short-lived.”
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