For the third time in the last four Thursdays, the natural gas futures market rallied higher following the release of surprisingly bullish storage news (164 Bcf withdrawal). And while bears are not ready to throw in the towel just yet, analysts and market-watchers agree that it is becoming easier to make the case that prices could move higher from current levels.
On its first day in the limelight as the Nymex prompt contract, April rebounded to fill in a nagging gap left on the chart from early December. However, once the initial excitement wore off, the market was free to drift lazily sideways Thursday. It closed at $5.391, up 17 cents for the session, and within striking distance of its $5.43 high for the session.
According to the Energy Information Administration, 164 Bcf was pulled from storage during the week ending Feb. 20, dropping inventories to 1,267 Bcf. Not only was the withdrawal deemed bullish versus the year-ago and five-year average volumes of 154 Bcf and 97 Bcf, respectively, it also was supportive versus the common 140-154 Bcf range of expectations. Storage now stands 253 Bcf above the year-ago level, down from a 263 Bcf surplus a week ago. Versus the five-year average, this year’s storage level is in a deficit situation, having reversed from a 163 Bcf surplus to a 163 Bcf shortfall over the past four weeks.
“The 164 Bcf withdrawal was a surprise,” noted George Leide of Rafferty Technical Research. “We were in line with other estimates in calling for a 146 Bcf withdrawal…For whatever reason, the market has not done a good job of predicting the storage number over the last several weeks,” he said, referring to the tendency for the actual withdrawal figure to surpass the estimates.
Ron Barone of UBS agreed, adding that large storage withdrawals could be a sign that the market is expecting lower prices in the month of March. “Assuming the 164 Bcf is not a ‘lumpy figure’ the higher-than-expected withdrawal could be the result of lagged incremental demand post the ongoing decline in cash prices.” Another factor, Barone continued, is the seasonal cycling of storage by operators tied to ratchet provisions specified in their storage contracts.
The market responded to the bullish news with conviction Thursday and gained 22 cents in 30 minutes to top out at $5.43 at 11 a.m. EST. “The market held Wednesday where it needed to hold,” Leide continued. “Support was layered in at stand-out lows put in before the breakout.” Specifically, he pointed to the coincidence of the $5.06 low notched on the daily continuation chart on Dec. 1 and then again Wednesday.
After the 30-minute buying frenzy, the market quieted considerably, giving market-watchers time to catch their breath and contemplate the next price change. Although he is eager to take long profits moves above the $5.42 level, Leide is also mindful that a break above $5.51 could nullify the bear trend. “We have a head and shoulders top on the April chart. As long as we do not break above [the neckline] at $5.51, this remains a bearish pattern….We saw a nice rally earlier and are happy to take some profits here.”
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