In its first regular session action as the prompt-month contract, July natural gas futures sank like a rock following news from the Energy Information Administration (EIA) that 87 Bcf was injected into underground natural gas storage for the week ended May 23. The contract recorded a low of $11.466 before closing out Thursday’s regular session at $11.474, down 52.1 cents from Wednesday’s close.

Futures maintained their grip on negative territory after the 10:30 a.m. EDT release of EIA storage data showing a slightly greater increase in supplies than anticipated. The 87 Bcf build was slightly higher than an earlier Bloomberg poll looking for an increase of 84 Bcf and a Reuters survey showing an 86 Bcf increase.

Classifying the number as “mildly bearish,” Citi Futures Perspective analyst Tim Evans noted that the 87 Bcf build was slightly more than expected and near the 92 Bcf five-year average. The actual injection fell well short of last year’s build for the week of 106 Bcf.

“The healthy injections of the last few weeks has proved that we really are not missing that Independence Hub production,” he said. “Imagine what could happen when it returns to service.”

Evans said the weakness in natural gas was certainly helped along by July crude’s $4.41 drop to $126.62/bbl. “Not that natural gas traders don’t have a mind of their own, but they are watching crude carefully. The concern for the bearish gas traders is the theoretical upside to close the gap with the petroleum products.”

Some traders were circumspect in their reaction to the number. “I think the market is a little schizophrenic. It doesn’t know quite what to do here,” said Tom Saal of Commercial Brokerage, Miami.

July futures opened floor trading at $11.875, down 12 cents from Wednesday’s close, and just prior to the release of the storage data the contract had sagged to $11.803. However, the number apparently caught the attention of some nervous shorts, for July traded abruptly up to $12.011 before easing back down for the remainder of the session.

Risk managers are using the current price and volatility structure to place price hedges for producers.

“For natural gas we have been doing more [costless] collars because of the skew to the buy side,” said a Denver trader marketer. He added that their main objective was to maintain significant upside potential for producers because of the discounted Btu relationship of natural gas to petroleum.

“We haven’t gotten overly aggressive with natural gas. The 2008 strip is at approximately $12, but a $10 put which is $2 out of the money can be matched against $15 to $16 calls which are $3 to $4 out of the money. Your price protection is $2, but the upside is $3 to $4 higher,” he said.

As of May 23, working gas in storage stood at 1,701 Bcf, according to EIA estimates. Stocks are 321 Bcf less than last year at this time and 8 Bcf below the five-year average of 1,709 Bcf. The East region injected 48 Bcf and the producing and West regions chipped in 27 Bcf and 12 Bcf, respectively.

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