November natural gas futures knee-jerked lower Thursday morning following news that 69 Bcf had been injected into underground storage for the week ending Oct. 2. However, the action was short-lived as the prompt-month contract immediately resumed its assault on the psychological $5 resistance level.

Just prior to the 10:30 a.m. EDT report, the November contract had worked its way down to trade at $4.840. In the 10 minutes following the report’s release, futures put in a low of $4.808 before rallying to $5.045. Finishing out the regular session, November added 5.9 cents to $4.963 and December gained 5.6 cents to $5.739. November crude oil rose a hefty $2.12 to $71.69/bbl.

Observers were somewhat circumspect about the day’s advance in the face of an inventory report that had a bearish tilt to it. Industry consultant Bentek Energy had been expecting a 74 Bcf build, but most industry estimates were for an injection in the low 60s Bcf. Noting that he was on the record for a 50 Bcf build, Citi Futures Perspective analyst Tim Evans said the actual injection was “bearish,” citing the 62 Bcf consensus of the Reuters and Dow Jones surveys and the 61 Bcf average of the Bloomberg survey.

“The build was above the mid-point of the consensus forecast, although not fully outside the range,” he said. “The build was quite similar to the 70 Bcf five-year average, sustaining the year-on-five-year storage surplus at 480 Bcf. This also might suggest a somewhat more robust injection for the reports to follow.”

The actual 69 Bcf injection did, however, fall short of last year’s 87 Bcf build. As of Oct. 2 working gas levels in storage stood at 3,658 Bcf, a new all-time record, according to Energy Information Administration (EIA) estimates. Stocks are 473 Bcf higher than last year at this time and 480 Bcf above the five-year average of 3,178 Bcf. The East Region deposited 37 Bcf while the Producing and West regions added 24 Bcf and 8 Bcf, respectively.

Bearish or not, in spite of the disheartening price decline from a high of $13.694 posted in early July 2008, producers are able to make a very satisfactory return at current price levels, traders report. “I have a client with production in Pennsylvania and Oklahoma who has sold in the back months $5, $6 and $7 contracts and the idea was that the wells are better mechanically than what we used to have and production will be greater per well than normal,” said a New York broker. He added that the client said, “‘I don’t think we have the demand out there,'” but “he’s locked in some good numbers for him and his bank is very happy.”

The broker went on to say that the interesting part is that the client has enough of a line of credit that he can maintain his hedges if prices go to $13. “The client is saying, ‘I don’t care if prices go to $13; I want to lock in what I have now and I know I am making a really good return on my business.'”

The client realizes that prices may go higher and will have to make margin calls, but he said, “‘I will sell my gas for $13 and bank I want you to be there with me because even borrowing the money [for margin calls] I will make a lot of money selling at the prices I locked in,'” according to the broker.

The settlement of November futures at $4.963 puts prices in something of a demilitarized zone price wise, and market technicians see the market presently unable to prove either a bullish or bearish case. “The long shadow above Wednesday’s candlestick shows another failed attempt to break through our pivotal $5.072-5.179 resistance zone,” said Brian LaRose of United Energy. He said if November futures can clear that hurdle, $5.565 would be the next upside target. “To suggest a correction of the $2.409-5.120 advance is under way natgas needs to get back below $4.480,” he said in a note to clients.

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