A bearish natural gas storage draw report allowed natural gas futures to probe lower price levels once again on Thursday as the commodity was able to ignore the wild ride in crude futures, which was sparked higher by a deadly pipeline blast. January natural gas futures, in its first regular session action as front month, closed at $7.452, down 3.4 cents from Wednesday.
While January natural gas traded a tidy 16 cent range on the day, January crude traded within a $2.60 range. Enbridge Energy Partners LP said a heavy crude pipeline explosion near the Clearbrook, MN, terminal resulted in the deaths of two Enbridge employees. One crude pipe was to be back on line late Thursday while another was expected to be off line a few more days. The pipes are seen as major oil arteries between Canada and the United States.
Crude prices spiked to a high of $93.05/bbl on news of the explosion, but promptly fell once the outage duration predictions were made public. January crude ended up settling at $91.01/bbl, up 39 cents on the day.
January natural gas futures on Thursday morning were trading at $7.520 just prior to the Energy Information Administration’s (EIA) natural gas storage report, which revealed that only 12 Bcf was removed from underground stores for the week ended Nov. 23. Traders, who were expecting a pull of just under 20 Bcf, responded by pushing the prompt-month contract lower in morning trade. Just before 11 a.m. EST, January natural gas reached the day’s low of $7.380, before edging higher.
Some market watchers hypothesized that the smallish withdrawal was a result of a slippage in demand during the holiday last week. “The 12 Bcf in net withdrawals from last week was bearish, below expectations and below the five-year average,” said Tim Evans, an analyst with Citigroup in New York. “We wonder if the Thanksgiving holiday might have cut into demand more than usual but, regardless, this indicates a weaker supply/demand balance in the market than we would have guessed.”
Other experts point to market participants finally coming to terms with current fundamentals. “Storage is full, but I think the real talking point here is the weather,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “All of the forecasting models from the independents and the National Weather Service seem to be in agreement. We are going to stay cold through the second week of December, but after that they are all calling for a warm-up that is expected to stick around through January. If it does play out that way then we have some downside to cover here folks.
“The recent drop in natural gas futures prices can be chalked up to direct confrontation as opposed to distant contemplation,” he added. “It’s one thing to say a month ago that we are going to have a warm winter. Now in the last week of November, you can look over the fence and see that the forecasters are still calling for a warm-up. It has a lot more of an impact as we get closer.”
Kennedy said he sees support residing at $7.250, with psychological support just behind it at $7.
Market technicians noted the weak settlement of the expired December contract Wednesday and suggested that further price weakness lies ahead. “The spot roll over rally to the January contract does nothing to mitigate the bearish message of the price action since the $8.712 high,” said Walter Zimmerman of United Energy. Prior to Thursday’s session, he said he was looking for technical resistance in the form of ratio retracements at $7.540 and $7.765. Surprisingly enough, the January contract’s high on the day turned out to be $7.540.
Ahead of the storage report, a Reuters survey of 23 industry players was expecting an average withdrawal of 19 Bcf, while Bentek Energy said its flow model indicated a 17 Bcf pull. The actual 12 Bcf draw paled in comparison to last year’s 27 Bcf withdrawal and the five-year average pull for the week of 29 Bcf.
As of Nov. 23, working gas in storage stood at 3,528 Bcf, according to EIA estimates. Stocks are 106 Bcf higher than last year at this time and 301 Bcf above the five-year average of 3,227 Bcf. The East region withdrew 14 Bcf and the West region removed 1 Bcf, while the Producing region injected 3 Bcf for the week.
Commenting on the EIA’s report, Lehman Brothers analyst Daniel Guertin said the bump in surplus is due “mainly to yet another mild week for the United States compared to normal (30-year normal) and also to lower industrial natural gas demand associated with the Thanksgiving holiday last Thursday.” However, he added that the surplus over last year’s storage level likely won’t stick around for long.
“Temperatures since last week have turned sharply colder for the United States,” Guertin said in a Commodities Data Watch note on Thursday. “The current week is forecast to average cooler than normal on a population-weighted basis and will be the coldest week of the heating season thus far. This has resulted in a large increase in natural gas demand for residential/commercial heating, and this spike in demand will be reflected in this week’s U.S. natural gas storage change, which will be reported by the EIA next Thursday (Dec. 6).”
He added that next week is forecast to be even colder than this week as much colder Arctic air spills southward out of western and central Canada beginning this weekend and continuing into next week. He expects this change in the weather pattern will likely lead to a rather large storage withdrawal for the first full week of December, noting that preliminary estimates put the total U.S. storage draw for the week-ending Dec. 7 at greater than 150 Bcf.
“December 2007 will begin with a substantial net U.S. natural gas storage surplus to 2006, probably on the order of 40-50 Bcf,” he said. “The surplus to 2006 will likely turn back into a deficit in December since temperatures across the United States last December were exceptionally warm. December 2006 averaged 17% warmer than the 30-year normal for the U.S. on a population-weighted basis and was one of the warmest Decembers on record.”
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