While coming in below most industry estimates by a few billion cubic feet, the Energy Information Administration’s 77 Bcf storage injection reported for the week ended Sept. 22 was still significantly larger than last year’s 56 Bcf build and just topped the five-year average injection of 75 Bcf. The knee-jerk reaction in natural gas futures was to move higher, but November natural gas ultimately ended up closing at $5.392, down 27.7 cents on the day.

Prior to the 10:30 a.m. EDT report, November natural gas futures, in its first regular session action as the prompt month, was trading at $5.480. Immediately following the report, the contract pushed higher to record a $5.630 high on the day as of 11 a.m. However, the recent bear move and the ever-growing natural gas storage surplus proved too strong as November natural gas slumped in the afternoon, recording a $5.350 low before settlement.

The 77 Bcf injection officially put working gas in storage above the traditional 3.2 Tcf full level at 3.254 Tcf with five weeks remaining in the traditional injection season.

Commenting on the slightly smaller than expected injection, enerjay LLC broker Jay Levine said the report could reflect a combination of the market’s need for gas and the lack of space to store it. “The reality is it is probably a combination of those two factors,” he said.

“My gut instinct is that the Northeast is going to be cooler-than-normal this winter. The question is will that be enough to turn the tide of this market?” Levine queried. “In my opinion, this is a long-term bull market and we have of late been in a short- to-intermediate-term bear trend because the fundamentals are poor. If there has been any surprise, it has been that we have made it through the bulk of the hurricane season, and we haven’t had anything in the way of a storm in the Gulf of Mexico. The onset of early cold could get the market thinking again about supply issues, but will it be enough to turn this thing around? I don’t know.”

Noting that storage is pretty much full, Rafferty Technical Research’s Steve Blair said storage capacity was, and continues to be, a problem. “Back when I first started trading natural gas, people said once you approached 3.2 Tcf, it got really hard to put more gas in storage. Fast forward to now, people talk about getting up to 3.4 Tcf to 3.5 Tcf into storage before it gets really difficult to find a parking space,” he said. “Another difficulty appears to be finding storage down the road. I was talking with a utility in the South yesterday and the trader was telling me that they couldn’t even find storage room for 2007. He said storage is booked full through all of calendar 2007. I didn’t realize that storage was that booked.”

Blair said he wasn’t very surprised by November’s drop Thursday because October went off of the board so far below it. “In fact, if Wednesday wasn’t expiration, the October contract would have been breaking below a very major number when we got under $4.40 and stayed below it,” Blair said. “Basis the October contract, a convincing break and close below $4.40 would have left us another 90 cents lower before the next support zone. If the October contract had another week we could have at least seen $4 even, if not lower.

“I think November is mostly following suit with what October was doing,” he added. “We still have the same storage situation and the lack of weather. With storage filling up, producers are going to have to sell off the gas instead. It’s simple supply/demand economics…we have a whole lot of supply and not a lot of demand. I wouldn’t be surprised to see the November contract over the next week or so make a run at the $5 level as a result.”

An Ohio Valley Power trader said Wednesday that current fundamentals could push November sub-$5. “I think storage is the trump card in the natural gas and power markets,” the power trader said. He pointed out that the November contract has traded below $5.50, and “as long as there continue to be big builds, and no indications of winter weather, what is there to prevent November from trading below $5?” he queried.

Costs for producers have risen substantially and tumbling natural gas prices have motivated Chesapeake Energy of Oklahoma City to announce the shut-in of 125-150 MMcf/d (gross), which accounts for the bulk of the independent producer’s remaining unhedged production.(see Daily GPI, Sept. 28). Although Chesapeake would not say what price it would take to resume production, it did indicate that 92% of the second half of 2006 production was hedged at a Nymex price of $9.24.

Taking a closer look at the storage report, most industry expectations had been for a build in the mid-80s Bcf. A Reuters survey of 22 industry players forecast an injection 84 Bcf, while the ICAP derivatives auction held after the close of Nymex floor trading Wednesday showed a consensus estimate of an 86 Bcf build. Golden, CO-based Bentek Energy predicted an 85 Bcf injection.

As of Sept. 22, stocks were 377 Bcf higher than the same time last year and 354 Bcf above the five-year average of 2,900 Bcf. The East region injected 39 Bcf for the week while the Producing and West regions chipped in 27 Bcf and 11 Bcf, respectively.

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