January natural gas managed a third straight day of nominal gains Thursday as traders largely discounted storage data that showed an ever increasing surplus with no end to the above-average increases in sight. At the close January had risen 1.4 cent to $3.169 and February had risen 0.8 cent to $3.206. February crude oil added 86 cents to $99.53/bbl.

The early price driver was the 10:30 a.m. EST Energy Information Administration (EIA) report on natural gas inventories. The EIA reported a withdrawal of 100 Bcf, slightly below expectations and much less than historical norms. Prices initially slumped to a low of $3.100 but eventually recovered.

Analysts drew parallels with the heating oil market and noted that like heating oil, “If it gets cold in the early months, utilities will hold on to the inventory because they are afraid ‘if it’s cold all winter, I might run out.’ They will hit prompt supplies hard and drive the price up,” said Bill O’Grady, vice president at Confluence Asset Management in St. Louis.

“But if you get through the first couple of months because it’s mild, then especially with natural gas those facilities have to be cleared. The gas has to come out of storage, and even if the weather gets cold, it doesn’t tend to help a lot. It has to get really, really cold in places where it normally doesn’t get cold, like Atlanta, and stay that way for an extended period.”

January could be a difficult month for prices. “The lowest price ever for futures was recorded in January. It was mild, there was ample inventory, and the gas had to come out of storage, and it just killed the market. When it is cold really matters. If it’s cold in December, and bitterly cold in January, you’ll generally see pretty good prices,” he said.

On Dec. 21, 2010 the high in Pittsburgh only reached 29 degrees, nine degrees below normal, but on the same date in 2011 Pittsburgh posted a high of 60, 22 degrees above normal. The cold 2010 helped spot futures advance from an October 2010 low of $3.212 to a high of $4.879 in January 2011 after a record injection season.

O’Grady said it was not out of the question that prices could trade as low as the $2.409 reached in the fall of 2009. “This next four to five weeks are going to be really tough. You start to see inventory sales accelerate and if you don’t have the weather to support it, you still need to move the inventory out plus there is all this gas in production that has to find a home.”

He added that bitter cold for most of the month in all the high-population areas would be necessary, and that “would arrest the price decline, but it doesn’t turn the market. They [utilities] are only using the market to get that inventory sold.”

The latest gas storage figures gave traders and analysts an idea of just how much inventory will have to be sold. For the moment the increases relative to historical norms are large. The latest data showed that the surplus relative to both last year and the five-year average continued to increase.

Storage gas now stands at 3,629 Bcf, a healthy 235 Bcf higher than last year and 387 Bcf more than the five-year average. Last year at this time 181 Bcf was pulled from storage, and the five-year average withdrawal is 140 Bcf. Prior to the report analysts at Citi Futures Perspective were forecasting a withdrawal of 109 Bcf and a Reuters poll of 24 traders and analysts showed an average 104 Bcf decline with a range of 93-119 Bcf. Industry consultant Bentek Energy had calculated a pull of 101 Bcf.

Tim Evans at Citi forecasts that the surplus will soon grow to 439 Bcf “with no particular reason to assume the trend stops there. Natural gas prices may be supported by the idea that prices have fallen far enough, but as long as the storage surplus keeps growing, there’s downward fundamental pressure on prices.”

Near-term weather forecasts don’t look like they will be of much help in alleviating the continuing surplus builds. WSI Corp. of Andover, MA, in its 11- to 15-day outlook says, “With the exception of the West and Gulf coasts, above- and much-above-normal temperatures are forecast over most of the country. Anomalies as warm as 10-15 degrees above normal are anticipated over the north-central U.S.” Thursday’s forecast is warmer than Wednesday’s, the forecaster said.

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