With commercial traders reticent to make a move before the weekend and many local speculators leaving the trading pit early for their annual trip to the Kentucky Derby, natural gas futures moved quietly lower Friday to cap off a negative week of trading activity. With its $5.255 close, the June contract finished 1.2 cents lower for the session and down almost 30 cents for the week.

Traders were quick to point to Thursday’s Energy Information Administration storage report as having a lingering bearish impact on the market Friday. According to the EIA, 57 Bcf was added to underground stocks during the week ending April 25, bringing total working gas levels up to 741 Bcf. The weekly net refill figure, which easily exceeded expectations centered on a 45 Bcf build, was immediately deemed bearish by traders and analysts Thursday. The 57 Bcf build also eclipsed both last year’s 31 Bcf injection as well as the five-year average refill of 47 Bcf. During the week ending April 18, which saw even milder temperatures, the market managed a 61 Bcf build.

Looking ahead, traders fear that the warmer weather last week will result in an even larger storage injection when new data is released Thursday. “Our initial estimation for [this] week’s EIA report looks for a build near 90 Bcf and possibly higher,” wrote Citigroup’s Kyle Cooper in a note to customers Friday. “A build in excess of 100 Bcf is not considered completely out of the question if the same comparisons to the regression model hold true,” he continued, referring to his theory regarding the increased importance of residential and commercial demand. “R&C demand clearly drops dramatically as temperatures near approximately 68.5 degrees. Thus, with this theory, [this] week’s report may exceed the regression model by even more than [last] week’s as even more heaters [were] idled and before the [air conditioners] kick on.”

Tom Saal of Miami-based Commercial Brokerage Corp. agrees that storage data could reveal another large refill this week. “We were able to inject 57 [Bcf] when there was still some cool weather in the northern half of the country. We probably put 80-90 Bcf in the ground with the warmer weather [last] week,” he said.

A storage injection of 90 Bcf would be bearish not only on an absolute basis, but also in comparison to historical refills. Last year at this time storage increased by 39 Bcf and the five-year average build is 62 Bcf.

Taking into account some key technical considerations, Saal looks for a continuation to the downside this week. “The May contract went off the board in the bottom half of its weekly trading range and below April’s settlement price. June didn’t do much better, making a lower low, a lower high and closing lower for the week.” In daily technicals, Saal sees support at $5.06 and senses that a break below that level of support could lead to much lower prices. Accordingly, he suggests his customers might want to take advantage of the relatively low volatility out there right now to buy reasonably priced options. Specifically, Saal points to the $5.00 and $4.50 June put options, priced Friday at 9 cents and 4 cents respectively, as good hedges for producers.

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