After dipping to new two-week lows following the announcement that 95 Bcf was pulled from storage inventories the week prior, natural gas futures turned higher late Friday morning and managed to claw back above unchanged on the day. With that the January 2003 contract expired at $4.988, up 2.6 cents for the day and about 70 cents above where it began its tenure as Nymex prompt contract back in late November.

The remaining winter contracts followed January’s lead. February gained 3.2 cents to $5.022 and March advanced 1.2 cents to $4.892.

However, the big rally Friday was in the out months, which unlike the January through March contracts are not depressed by the potential for a mild El Nino winter. Also a factor in the buying, traders agreed, was renewed concerns that the pace of storage withdrawals infers that a supply crunch — which has been echoed by many analysts and investment houses over the past six months — is a possibility that deserves the market’s attention. Both the April-October 2003 summer strip and the winter 2003/04 strip soared 8.6 cents Friday. Given the lack of adequate measures of U.S. gas production and consumption, it takes a flat-out cold winter to show up shortfalls.

Working gas in storage was down 95 Bcf to 2,540 Bcf as of Dec. 20, 2002, according to the Energy Information Administration. Stocks were 575 Bcf less than last year at this time and 128 Bcf below the five-year average of 2,668 Bcf. In the East Region, stocks were 161 Bcf below the five-year average following net withdrawals of 69 Bcf. Stocks in the Producing Region were 23 Bcf below the five-year average of 716 Bcf after a net withdrawal of 17 Bcf. Stocks in the West Region were 56 Bcf above the five-year average after a net drawdown of 9 Bcf.

The 95 Bcf withdrawal came as a surprise to traders, who, after having been burned by underestimating back-to-back drawdowns of 162 and 159 Bcf in prior weeks, were generally looking for a figure in the110-130 Bcf area. However, based strictly on the low heating degree day accumulation (mild weather) during the Dec. 14-20 time frame, the 95 Bcf withdrawal was reasonable. Last year the market pulled 80 Bcf from the ground and the five-year average draw is 118 Bcf.

For Thomas Driscoll of Lehman Brothers in New York, weather adjusted storage withdrawals over the last four weeks have averaged 4.7 Bcf/d (33 Bcf a week ) more than the five-year average (see related story). “Strong storage withdrawals have occurred despite strengthening natural gas prices,” he wrote in a note to clients Friday. “This apparent tightening in the gas markets, combined with strong heating demand and the related strong draw the past few weeks, has set the stage for strong prices, at least into next year.”

For George Leide of Rafferty Technical Research in New York, the number came in at the bottom end of expectations and that led to an immediate push to the downside Friday morning. And looking ahead to February’s tenure as prompt contract, Leide sees more downside potential. “We have a target in the $4.73-75 area, basis the February contract, and look to start picking up some length just [above] the $4.75 area,” he said.

While agreeing with Leide that February is guilty of being bearish until proven otherwise, Ed Kennedy of Commercial Brokerage Corp. in Miami was quick to note that you “can throw technical analysis out the door on expiration day. The price action [is] dictated by who is willing to make or take delivery and at what price level.” Although prices of nearly $5.00 may seem pricey to many, it represented enough of a bargain to entice buyers to lift prices higher into the close Friday. It is also fair to note here that since notching a $5.53 high on Dec. 12, January futures had been hit by moderate to heavy flows of long liquidation. Short-covering was to be expected on expiration day.

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