Boosted by a weekly storage withdrawal (59 Bcf) that exceeded all market expectations, the natural gas futures market vaulted higher again Thursday morning, soaring past the important $6.00 mark. After pausing to trade sideways during the middle of the session, the January contract was goosed higher again in the final 90 minutes of trading Thursday.
When the dust had settled and the orders were counted in the data room at Nymex, the results were staggering. By closing at $6.337, the January contract was up 58.1 cents for the session and $1.412 for the week — a 29% increase. At 126,892, volume in the gas pit was heavy for the fourth-straight session, evidence that non-commercial fund traders are busy covering their shorts.
According to the Energy Information Administration, 59 Bcf was pulled from underground storage facilities last week, decreasing the volume of working gas in the lower 48 states to 3,095 Bcf. Versus expectations centered on a 20-42 Bcf withdrawal, the storage report was undeniably bullish. Last week the EIA announced a 1 Bcf withdrawal and the five-year average takeaway for this week is 29 Bcf.
Storage now stands 117 Bcf more than the five-year average, down from the 147 Bcf surplus of a week ago. The only glimmer of hope for market bears was how the withdrawal compared versus last year’s 91 Bcf drawdown. Because of that comparison, the surplus to last year increased to 139 Bcf from 107 Bcf last week.
“This number was a real shocker,” said George Leide of New York-based Rafferty Technical Research. “Our internal number was 40 Bcf and we easily exceeded that.”
Looking back at a market that has risen $1.40 in the last four trading sessions, Leide reiterated what other market watchers have suggested. “Weather was the catalyst that got this thing going, but it has been the funds that have really driven it higher. I have even heard that some funds are getting on the long side of this market.”
For the last couple of months, traders have become increasingly concerned with the growing net short position held by the non-commercial “fund” traders. In fact, many market-watchers believe that the market’s inability to drop below the $4.60 level during the month of November is a direct result of traders’ reluctance to press the short side of the market with such a large speculative short position out there.
According to the latest Commitments of Traders report released Monday by the Commodity Futures Trading Commission, non-commercial accounts were still net short 48,806 positions as of Nov. 25, down slightly from a peak of 52,244 short positions two weeks prior. The next COT report will be released Friday. However, because that data will only include trading through Tuesday, the information will be of limited value.
“Producers were good sellers [Thursday],” commented Edward Kennedy of Commercial Brokerage Corp. “They are familiar with the market’s tendency to spike in December and fall in January. Rig counts are up…. Why not take advantage of these $6.00-plus prices?” He may have a point. By moving well above $6.00, the January contract has risen to rarefied levels only reached by prompt months on three other occasions in the commodity’s 13-year history (Dec00/Jan01, Feb/Mar03, and May/Jun03).
And while it is safe to assume that fund traders still have plenty of buying left to go, it is even a better bet that prices will retrace at least some portion of recent gains before too long. And though some think the market is ripe for some profit taking ahead of the weekend, attempting to pick a top right now is a dicey proposition, argues Craig Coberly of GSC Energy in Atlanta. “There is no clear [Elliot] Wave relationship out there on which to base your trading decisions.
As it turns out, his comments Thursday morning comments were somewhat prophetic. No sooner had he shied away from the sell side when the market again accelerated to the upside Thursday afternoon.
Leide agrees that it is difficult and potentially financially disastrous to try to sell this thing up here. “A close below $5.80 could be a signal that the market is on the defensive. Otherwise, there aren’t really any good sell signals up here,” he said.
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