In a surprising show of strength considering the weak underlying cash prices and a bearish storage report (7 Bcf injection) announced Thursday morning, natural gas futures rallied back to the mid-$5.20s late Thursday morning. However, buying dried up for the expiring April contract and sellers were waiting to push it lower at the closing bell. At $5.146, April completed its tenure as prompt month up 4.9 cents on the day, but down 30% since becoming prompt month. The new prompt month, May, surged 9.3 cents to close at $5.24.

According to the Energy Information Administration, working gas in storage was up 7 Bcf to 643 Bcf as of March 21. Versus nearly all yardsticks, this report was bearish. Not only did the injection come in sharp contrast to the year-ago and five-year average withdrawals of 75 Bcf and 59 Bcf, respectively, but the net change fell in the upper end of the -47 to +45 range of expectations. Stocks are now 918 Bcf less than last year, down from the 1,000 Bcf deficit of a week ago.

Most traders were at least a little stunned by the market’s ability to rally despite undeniably bearish storage news. While the early start to the injection season solidly favors the bears, they failed to take advantage of this fact Thursday. Instead, technical buyers pointed to layers of support in and around the $5.00 area as the key factor keeping the market from falling. “We are a buyer down at these [near $5.00] levels in May futures,” said George Leide of New York-based Rafferty Technical Research. “As long as we don’t get a close beneath support at $4.95, you have got to respect the recent trading range.”

However, Leide is not ready to bet the farm on the long side of the market. Recent rallies, he said, have been tired and that, coupled with the storage news the market received Thursday, puts the bears in control. On the upside, Leide sees minor resistance for the May contract in the $5.23-29 area. A break higher would put pressure on major resistance at $5.41.

Looking ahead, Ron Barone of UBS Warburg looks for an even bigger injection next week. “This, combined with the pending 61 Bcf year-ago withdrawal comparison, should yield another considerable decline in the deficit upon the release of the next EIA report,” he said in a note to customers Thursday. Beyond this period, Barone sees the possibility that continued mismatches between storage this year and last could bring down the year-on-year deficit to the 750-800 Bcf range from 918 Bcf by late April, given the “latest near-term temperature outlook, some level of ongoing demand destruction, and the next withdrawal comparison of 9 Bcf (followed by injections of 15 and 69 Bcf).”

However, that is just about all the bearish news there is on the subject of storage. Although the market is sure to cut into the deficit, it will still be at or near record low levels for the foreseeable future. “The low storage balance will require a significant injection pace of 11 Bcf/day to get supplies to the 3,000 Bcf comfort level by Nov. 1, 2003 versus the prior nine-year average of 9 Bcf/day,” Barone noted. He believes that the 3,000 Bcf target is unlikely considering the heightened level of nuclear maintenance activity this spring and comparably weak Pacific Northwest hydro conditions.

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