Those looking for a natural gas storage injection Thursday morning ended up being equally as wrong as those looking for a withdrawal…sort of…as the Energy Information Administration (EIA) reported that inventory levels remained flat during the week ending March 27. Further confounding traders was the disclosure by the EIA that it made “reclassifications” and “corrections” to the overall level of storage, which effectively canceled out what would have been a 9 Bcf injection for the week. The confusion sent May natural gas futures on an up-and-down odyssey immediately following the report before the contract ended up closing at $3.782, up 8.7 cents from Wednesday’s finish.
Just prior to the 10:30 a.m. EDT report, the May contract was trading at $3.756, but in the minute of the release it spiked as high as $3.904 and fell as low as $3.662 as traders were unsure how to classify the numerically neutral report. It seemed the report offered something for both the bulls and the bears. On the one hand, most industry expectations had been for a build of a few billion cubic feet, but the report also had to contend with historical figures for the week. Last year for the similar week a 30 Bcf draw was reported while the five-year average for the week revealed a 23 Bcf pull. Heading into the report a Reuters survey of 21 industry players produced a range of expectations from a 12 Bcf draw to a 10 Bcf addition with an average expectation that 2 Bcf would be injected for the week.
Nearly 20 minutes after the report’s release, the May contract touched a low for the day of $3.638, but pushed higher from there. After reaching $3.842 just after 1 p.m. EDT, the contract wandered lower to the close. Incidentally, Thursday’s 8.7-cent climb just barely erased Wednesday’s 8.1-cent drop.
The government agency said the report for the week ending March 27 included reclassifications from working gas to base gas and corrections that reduced working gas stocks by an estimated 9 Bcf. Even after the revisions, the year-on-year and year-on-five-year average surpluses grew. Working gas in storage — now pinned at 1,654 Bcf — is now 402 Bcf higher than last year at this time and 303 Bcf above the five-year average of 1,351 Bcf. The East region withdrew 23 Bcf for the week, but the Producing and West regions injected 22 Bcf and 1 Bcf, respectively, making the report a wash.
Summing up the hesitation in the market to classify the report, Citi Futures Perspective analyst Tim Evans called it “neutral/bearish,” but noted there might be a selling opportunity to be had. “The unchanged storage was slightly below the plus 2 Bcf expectation, but that’s a small miss, and the report was bearish relative to the 23 Bcf five-year average net withdrawal,” he said. “We’d be inclined to sell into the rally off this report.”
As for the reclassification, Evans said it definitely supported the bears’ case. “In addition to reporting that U.S. working gas in storage was unchanged for last week, the DOE also reported that it had reclassified 9 Bcf from working gas to base gas. In other words, if not for the reclassification, storage would have been up by 9 Bcf, implying a more bearish supply/demand balance.”
Evans told NGI that the EIA does corrections from time-to-time just to audit things on a more careful basis. “Corrections are fairly routine, but the reclassification is a bigger deal,” he said. “In this case, it shows the supply/demand balance was effectively weaker than the unchanged inventory levels report showed. Basically, the Bentek Energy folks who were forecasting a 9 Bcf injection are probably doing a victory dance because they hit the nail on the head.”
Commenting on the volatility immediately following the report, Evans said there was certainly a knee-jerk reaction. “It was almost as if someone had their large buy order ready to go to launch regardless of the storage number,” he said. “I don’t know if it was their intention to create mayhem, but that is what happened.”
Addressing the current price level, the analyst said he sees no real reason to go picking a bottom. “You buy this market for purposes of sidestepping risk, but you shouldn’t be buying this thing because you think the market is going to reverse sharply and that you are going to make a killing,” Evans told NGI. “What’s cheap can continue to become cheaper and the supply-demand balance is still very bearish. The drop in drilling activity is eventually going to translate into falling output, which will then translate into a more overall bullish balance in the market. However, that looks more like a second half of the year story, not an urgent reason to buy on April 2.”
Traders looking for price volatility have been amply rewarded with recent inventory reports. Two weeks ago expectations for the week ended March 13 were for a withdrawal of between 15 to 20 Bcf, but a 30 Bcf deduction was revealed and prices rocketed higher. At the close of trading March 19, which is when the report was released, April futures had gained 49 cents to $4.174 (see Daily GPI, March 20). Last week the bears returned the favor. Traders were looking for a modest draw of 10 Bcf yet the actual figure came in at a build of 3 Bcf. By the time the dust had cleared on the day of that report (March 26), April futures had plunged 38.2 cents to $3.947 (see Daily GPI, March 27).
Analysts see the storage report for all its volatility as a key component of price direction. “Of all the factors that have woven their way in and out of this market’s recent history, the one that has consistently been a major influence has been inventories,” said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm. He added that “anyone who has traded natural gas for a full 12 months or more knows, by now, that April’s coldest weather is never cold enough. It is certainly not going to be cold enough to eat into a surplus of 280 Bcf [now 303 Bcf] against the five-year average. In 2002, this week’s EIA drawdown was 65 Bcf. Even if we see three of those in a row, which is never going to happen, there would still be a healthy surplus against a year ago.”
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