While the East region withdrew 11 Bcf from natural gas storage for the week ended Nov. 16, the Producing and West regions combined to make the country’s net movement for the week a 4 Bcf injection, according to the Energy Information Administration’s (EIA) Wednesday report. Despite the bearish number, it appeared that a major media storage reporting error, combined with a new forecast for near-term cold in the Midwest, pushed December natural gas futures to a high of $7.620 before the contract closed at $7.550, up 7.3 cents from Tuesday’s close.
Leading up to the report, it appeared that the industry was split on whether the market would see an injection or a withdrawal from storage. However, one week after the first withdrawal of the season, storage flipped back to injection. “The 4 Bcf build was slightly larger than generally expected, but not a complete surprise,” said Tim Evans, an analyst with Citigroup in New York. “It does imply a modest bearish shift in the supply/demand balance that will ripple through our forecasts though.”
Steve Blair, a broker with Rafferty Technical Research in New York, said a couple of factors likely propped up the market. “About a half hour or so before the storage report, futures rallied, supposedly off of a mid-day weather forecast from WSI, which said the Midwest was going to be colder than originally anticipated through Tuesday.” Blair added that a prominent cable news service might have helped the rally when it falsely reported the storage number as a withdrawal.
“They misreported the number,” Blair said. “It looks like they mistook the East region number for the country’s total, so they reported an 11 Bcf withdrawal for about 10 minutes following the report. I think that definitely confused the market a bit on Wednesday and might have helped to keep prices firm.”
Looking at the December contract, Blair said his firm had support at $7.580, $7.490 and then $7.370, which is likely the strongest level. “The market kind of drifted through our first two support levels Tuesday, but couldn’t get under the third level, despite attempts overnight and during the regular session,” Blair said.
“The storage report is really meaningless right now because everyone knows it is full. Weather is king during this period,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “We are seeing some fund buying coming in here. The rumor out there for months is that the funds are long crude and short natural gas. It is interesting we are now seeing some downward pressure on crude and some short-covering on natural gas. Are we witnessing the unwinding of that spread, I don’t know. You do get a 40% break on margins if you are long one and short the other, so that might have been one reason to do the spread.”
Kennedy noted that the recent trading range is alive and well. “It will likely take some significant weather or the prolonged lack of significant weather to move natural gas out of this area. I haven’t seen any change in the December weather forecasts for above-normal temperatures from the independent forecasters. However, the picture will likely be clearer in the coming week as we get closer to December. If anything changes here and a cold snap develops, there could be some people caught short out here.”
Expectations for Wednesday’s report ranged from a small withdrawal to a small injection. According to some insiders, supplies may continue to build through November, typically considered the first month of the heating season. A Bloomberg survey was expecting a 2 Bcf injection, but the range of responses spanned from a 5 Bcf withdrawal to a 5 Bcf injection.
Ron Denhardt, vice president of natural gas services for Strategic Energy & Economic Research Inc., was expecting a 3 Bcf injection, while Citigroup analyst Tim Evans said he had been eyeing a 5 Bcf withdrawal. The number revealed Wednesday compares to no change last year and the five-year average of a 7 Bcf withdrawal.
As of Nov. 16, working gas in storage stood at 3,540 Bcf, according to EIA estimates. Stocks are 91 Bcf higher than last year at this time and 284 Bcf above the five-year average of 3,256 Bcf. In contrast to the East region’s 11 Bcf withdrawal, the Producing region injected 8 Bcf and the West region added 7 Bcf for the week.
Market technicians see the ball as now in the bulls’ court to show that prices can advance. Tuesday’s price drubbing left December futures 31.0 cents lower at $7.477 and settled near the $7.430-7.380 support zone targeted by analyst Walter Zimmerman of United Energy. “A break below this area would open the door to a further decline to the 0.7862 retracement from the $8.712 high at $7.085. With the seasonalities on the side of the bears, Wednesday looks to be ‘rally or else’ time for the bulls,” he said in a note to clients.
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