Fueled by Wednesday’s 30.6-cent gain, natural gas futures surged higher at the open yesterday as traders salivated over the probability of another sub-100 Bcf storage figure next Wednesday. However, the combination of mild weather forecasts for the weekend and nervous new length proved to be too much, leaving bulls almost defenseless as prices cascaded lower in the afternoon. The August contract closed at $3.128, down 14.8 cents on its penultimate trading day.

“The only thing bullish about the 84 Bcf injection is that it wasn’t 100 [Bcf],” said Jay Levine of Advest Inc. And while the remark was made in jest, it aptly summed up the market’s mentality over the past two days. After all, the 84 Bcf injection was within the 80-100 Bcf range of expectations and above last year’s 54 Bcf figure. What then made it so bullish that prices rocketed more than 10% in a couple of hours? The answer is simply that the market had become conditioned to seeing triple-digit storage injections. Last week’s injection fell short of that and the market made a knee-jerk reaction, traders agreed. “The injection number is still a quite a bit stronger than the injection levels of recent years and both the year-over-year surplus and the surplus versus five-year averages rose significantly,” said Thomas Driscoll of Lehman Brothers. “The injection was 3.4 Bcf/d above five-year averages — if we continue to put away an extra 3.4 Bcf/d, storage would exceed 3,300 Bcf before the end of October. We need to see injections slow further and gas prices may need to come down to induce more demand.”

Looking ahead, Driscoll anticipates an injection of 90 Bcf (12.9 Bcf/d) for the week ending today. “This would leave inventory levels at 2,216 Bcf, 296 Bcf above last year. Our injection forecast is based on the National Oceanic and Atmospheric Association’s (NOAA) forecast for both heating degree days and cooling degree days. NOAA estimates air conditioning customer-weighted cooling degree days of 89 for the current week versus 84 normally and 69 last year.”

As is always the case on expiration day, prices will be decided by how many people are willing to make or take delivery of their futures contracts and at what price. Following losses in the last three expirations, traders are somewhat pessimistic about the market’s chances to rebound Friday. Instead, most look for a close in the $3.00-11 area.

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