Natural gas futures got all the support they needed Thursday to exit the recent $3.800-4.490 trading range to the upside after a bullish Energy Information Administration (EIA) storage report revealed that a less-than-expected 88 Bcf was injected into underground storage for the week ending May 28, which allowed traders to push July futures easily through resistance at $4.500 in Thursday morning trade. News late Thursday that the federal government is shutting down all Gulf of Mexico (GOM) drilling until new rules are implemented could keep prices bolstered.

Just prior to the 10:30 a.m. EDT report, July natural gas futures were trading at $4.429, but in the minutes that immediately followed, the prompt-month contract shot to $4.589, well above the two-and-a-half-month high of $4.494. As the day progressed, futures recorded a high of $4.703 before closing out the regular session at $4.690, up 26.6 cents from Wednesday’s close.

While the six-month moratorium on drilling in the GOM announced last week apparently applied only to deepwater projects, the Interior Department clarified Thursday that all drilling in shallow water was being shut down as well until operators complied with new safety rules and inspections (see related story).

A front-month contract hasn’t traded higher in almost exactly three months. The last time futures traded higher was on March 4 when the April 2010 contract recorded a high of $4.787. Traders noted that the real test was passed Thursday when the market stayed above the $4.500 level on a closing basis.

“After futures traded above $4.500 in morning trade, everyone then turned their attention to whether it would close above that important price level,” said a New York trader. “Now that we have, I would still like to see it stick a day or two before I refocus my sights on $5 and above.”

Market watchers were scratching their heads a bit at the smallish build, with no other real explanation besides some warmer-than-normal temperatures last week. “The 88 Bcf in net injections was at the low end of the range of expectations and a clearly bullish report, especially since the degree day accumulations for the week suggested a weather-adjusted rise of 110 Bcf, more than the 104 Bcf build in the prior week,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “We’re not sure of the precise cause of the bullish surprise. Higher than expected air-conditioning demand might have been a factor, but there might have been a drop in available supply as well. This could give the bulls the rationale for the upside breakout they’ve been hoping for.”

Going into the report a Reuters survey of 23 industry players produced an estimated injection range of 85 Bcf to 110 Bcf with an average expectation of a 94 Bcf injection, while Bentek Energy’s flow model projected a 91 Bcf injection. The actual 88 Bcf build was smaller than both last year’s date-adjusted 121 Bcf build for the week as well as the five-year average injection of 99 Bcf.

As of May 28, working gas in storage stood at 2,357 Bcf, according to EIA estimates. Stocks are 38 Bcf higher than last year at this time and 306 Bcf above the five-year average of 2,051 Bcf. For the week the East Region injected 48 Bcf while the Producing and West regions added 23 Bcf and 17 Bcf, respectively.

Credit Suisse analyst Teri Viswanath noted that while Thursday’s report was definitely fuel for the bulls, she’s not so sure the rally will have far to run. “Reduction of the y-o-y storage surplus this month will likely keep natural gas prices supported. Today’s lower than expected storage release has fueled continued buying this week pushing the July 2010 contract back above $4.50 or the highest level since the start of the injection season,” she said. “However, we caution investors that the possibility of wider supply/demand balances during the 2nd half of the injection season will likely dampen any extended rally this summer.”

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