January natural gas inched lower Thursday as traders took the opportunity to sell into a seemingly bullish government inventory report and looked ahead to forecasts calling for above-normal temperatures. The Energy Information Administration (EIA) reported a withdrawal from inventories of 102 Bcf for the week ended Dec. 9, a greater draw than what the market was looking for. At the close, however, January had eased 0.9 cent to $3.127 and February had shed 1.0 cent to $3.177. January crude oil fell $1.08 to $93.87/bbl.

Once again analysts had difficulty reconciling earlier estimates with the EIA figures. “Historically there has been a fairly reliable correlation between visible storage facilities and the EIA figures, and it is surprising that whatever it is is not showing up,” said Kyle Cooper, managing director at IAF Advisors in Houston.

“It looks like the storage surplus is just going to keep growing for the next couple of weeks and it just goes back to Mother Nature, which is the ruling force. From that perspective it just says while this number might be bullish on a temperature-adjusted basis, the absolute number is still very bearish. Some latent demand could be entering the market, but the big swing is still weather. If weather is bearish, it’s going to be hard for the market to get bullish since Mother Nature is still the primary driver of overall demand.”

In the near term temperature forecasts are not supportive. “Above-normal temperatures are forecast over the eastern U.S. and most of the northern tier of the country. Below-normal readings are anticipated over the southwestern U.S.” said forecaster WSI Corp. of Andover, MA in its morning report. It predicted “anomalies as warm as 10 degrees above normal…to encompass the northern Plains.”

WSI cautioned that risks to the forecast included “temperatures trend[ing] warmer over the northern tier of the country and cooler over the southwestern U.S. than currently forecast. All models advertise [that] the positive PNA[Pacific North American pattern]/positive AO[Arctic Oscillation]/NAO [North Atlantic Oscillation] pattern that has developed over North America in early December will continue next week.”

Market bears were closely watching the 10:30 a.m. EST release of the EIA figures and in spite of a bullish report, prices settled in the loss column. Last week’s data showed a 20 Bcf withdrawal that was greater than expected and prices mounted a modest advance. It was deja vu all over again as the 102 Bcf pull was higher than expectations but this time prices were unable to mount an advance. Last year at this time 154 Bcf was pulled from storage and the five-year average is for a 142 Bcf withdrawal. IAF Advisors forecast a decline of just 88 Bcf and a Reuters poll of 26 analysts and traders resulted in a sample mean of 93 Bcf with a wide range from 68 Bcf to 110 Bcf.

Analysts continued to try to get their heads around differences between the EIA figures and what was estimated. Not only were the IAF figures and the Reuters poll off the mark, but industry consultant Bentek Energy, utilizing its North American flow model, predicted a 98 Bcf withdrawal. “There’s a discrepancy between EIA data and what is viewable in other physical space. This is five weeks in a row that the number has been well below expectations and you have to entertain the idea that something has changed,” Cooper said.

Study of the year-on-five-year averages may give some clues as to when this market may turn around. Tim Evans of Citi Futures Perspective in an analysis found that the stout rebound in prices from a low of $3.212 on Oct. 7, 2010 to a high of $4.879 on Jan. 24 was accompanied by a reduction in the year-on-five-year surplus from more than 350 Bcf to zero.

Things may get worse before they get better. Evans currently sees the current 347 Bcf year-on-five-year average storage surplus expanding to 431 Bcf as of Dec. 23, before falling back to 410 Bcf by Dec. 30. He called the rising surplus a function of higher-than-average production (up 6.4%) from a year ago.

“We would note that the comparison for the week ending Dec. 30 looks supportive compared with the five-year average, suggesting at least a break in the run of consecutive bearish comparisons,” Evans said. “The caution though is that the 11- to 15-day temperature outlook tends to be volatile and so, while it looks more supportive now, another shift in the forecast and we could be right back to the more neutral comparison of a day ago.”

Cooper noted that the comparison between the 2009 and 2010 year-on-five-year surpluses was “compelling, but you have to keep in mind that particularly with that 2009 surplus it was 500 Bcf above the five-year average, but that includes 2006, which was a very low number. Keep in mind both the differential and the absolute level.”

©Copyright 2011Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.