Aided by continuing cold and Thursday morning’s storage report expectations, with an assist from Interior Secretary Ken Salazar’s announcement of an ambitious reform of onshore drilling (see related story), February natural gas futures on Wednesday shot to a high of $6.034 before closing the regular session at $6.009, up 37.2 cents from Tuesday’s finish.
Wednesday’s up day continued what could best be described as a seesaw post-holiday week of trading. Monday’s 31.2-cent increase was followed by Tuesday’s 24.7-cent decline. Wednesday’s settle was the first time a front-month contract closed north of $6 since Jan. 5, 2009.
“Natural gas futures jumped above $6 Wednesday morning in lockstep with a late-morning announcement from the Interior secretary on more stringent regulations for oil and gas drilling on federal lands,” said Steve Blair, a broker with Rafferty Technical Research in New York. “I think the market saw this development as possibly hindering new development plans across the United States, which obviously would restrict new gas finds from coming to market.”
As for the wild swings, Blair said he believes the storage situation is at least partially to blame. “One of the only reasons we’ve been seeing the back and forth over the past few weeks is because the storage draw expectations have been much higher than the actual reports end up showing,” he said. “I’m not sure why that is. The only things I can pin the miscalculations to is that people are overestimating industrial gas demand or that shale production is higher than expected. We keep seeing prices forced higher only to be brought back down to earth when a storage report reveals that 20 Bcf less than what had been expected was withdrawn for a given week.”
Blair said the next move by prices would likely be dictated by Thursday morning’s storage report for the week ending Jan. 1. “We’ll have to wait and see. A bullish draw could easily push us to new highs for the move while another lower-than-expected decline could take the legs right out from under the bulls.”
Others in the trading community were similarly perplexed by the inability to pin down a storage number this winter. “I don’t know why projections have been so far off over the past few weeks,” said a Washington, DC-based broker. “The only thing I’ve heard through reports is that some guys wanted to take more swing gas rather than taking gas from storage. In the end I don’t think it changes the net result, but it could have messed up the data that forecasters use to make their estimates. Other than that, I’m not sure why this winter heating season has been tougher than normal for people to guess the number.”
Despite the blown forecasts, the broker said the smaller-than-expected withdrawals of the last few weeks “obviously have not translated into lower prices. The bearish implications of a smaller-than-expected withdrawal have not lasted long enough to get prices to sell off,” he added. “At the end of the day, whether the expectations are met or not met, the market tells you what it is going to be and people can wring their hands or not wring their hands depending on how much money they’ve got in them.”
Taking a closer look at Thursday morning’s report, a Reuters survey of 24 industry players produced withdrawals estimated to be from 129 Bcf to 170 Bcf with the average pull expectation coming in at 151 Bcf. Bentek Energy projects a withdrawal of 137 Bcf, which would bring inventory levels to 3,139 Bcf. The research firm expects an 89 Bcf pull from the East Region, a 31 Bcf pull from the Producing Region and a 17 Bcf pull from the West Region.
Bentek said its sample of storage facilities showed withdrawals increasing by a net 2.7 Bcf from the previous week, with the West Region increasing withdrawals by 3.9 Bcf and pulls in the East and Producing regions falling by 1.2 Bcf. “A major winter storm impacted most of the middle of the country over the holiday weekend with snowfall reported from Texas to Minnesota,” Bentek noted. “Storage withdrawals increased in the Rockies and in the Midcontinent, while they decreased at facilities along the East Coast and in the Southeast.”
The number revealed by the Energy Information Administration on Thursday morning will be compared to last year’s date-adjusted 61 Bcf pull and the five-year average draw for the week of 78 Bcf.
The trading community continues to monitor weather forecasts for any signs of a warm-up. While some forecasters see a warming up to “normal” temperatures in the near term from the Ohio Valley to New England, there appears to be another cold blast right behind it. MDA EarthSat in its 11- to 15-day outlook said the “period has trended colder overall, especially in the Midcontinent, where it looks like the next cold shot should arrive by mid-period.” MDA EarthSat admitted that its forecast relied more on an interpretation of European and Canadian models rather than American models, which showed cold headed to the East.
“Persistence also favors the colder scenario, especially if upper-latitude blocking remains in place as most of the guidance suggests. The Upper Midwest and Northeast should be warmest during the first half before gradually trending colder again late,” the forecaster said.
Analysts are taking a wait-and-see approach to the current swings in both prices and volatile inventory reports. “You have to step back and realize that we have a lot of gas in inventory but the surplus is coming in,” said a Chicago analyst. He added that production is still growing, and “demand outside of heating load is OK, but it is not scaring anybody. I can’t get worried that prices for 2010 are going to $7 or $8. It’s been cold for the last month, but I am really interested to see what happens to prices when we get the first real moderation in the temperature forecasts.”
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