After etching a 33-cent gain and propelling the market through key resistance Thursday, natural gas bulls cooled their heels Friday in a session that was more about position squaring ahead of the weekend than it was about market direction. At the closing bell the September contract was down 4.5 cents at $5.037. However, by closing above $5.00, the market ratified Thursday’s bull move, potentially setting the stage for more advances this week.

Though noting that the short-covering seen last Thursday had been pent up for some time, traders were still impressed by the vigor of the rally. September futures advanced 30 cents in just 40 minutes following the release of fresh storage data. According to the Energy Information Administration, underground storage increased 74 Bcf to 2,106 Bcf during the week ending Aug. 1. Though the refill was bearish in absolute terms as it easily surpassed the year-ago and five-year average builds of 33 and 51 Bcf respectively, it was perceived as bullish because it fell short of the common 75-85 Bcf range of expectations. At 2,106 Bcf, storage is now 461 Bcf less than last year and 234 Bcf below the five-year average.

With 13 weeks and roughly 900 Bcf left to reach the 3,000 Bcf mark by Nov. 1, the market needs to inject 69 Bcf/week from now through the end of the injection season. Although weekly refills have averaged a whopping 93 Bcf thus far this injection season, the market will find it increasingly difficult to keep up that pace. In 2001 when storage was at similarly low levels at this time of year, the market managed to build only 66 Bcf/week from August through October. By comparison, last year at this time when storage was much fuller, the last 12 injections of the season averaged just 50 Bcf.

Looking ahead, Kyle Cooper of Citigroup in Houston is predicting a build last week (to be released this Thursday) from the upper 60s Bcf to low 70s Bcf. “This will compare against a build last year of 53 Bcf, a build in 2001 of 46 Bcf, a three-year average build of 48 Bcf and a five-year average build of 51 Bcf,” he wrote in a note to clients Friday. He goes on to point out that while the current inventory level of 2,106 Bcf may fall short of the level last year and also the five-year average, it is not a record low. “For comparison purposes, in 2001 inventories were only at 2,036 Bcf. In 1997 inventories stood at 2,024 Bcf and in 1996, inventories were only at 1,921 Bcf. Current inventories exceed [all three of these years], yet prices are much higher.”

However, not all market watchers are as bearish. “It will be increasingly difficult for the market to inject the 69 Bcf a week that is necessary from now through November for the market to reach 3,000 Bcf,” said Jay Levine of New Hampshire-based Advest Inc. Add to that a fundamental “nervousness” in the increasingly constructive technical picture, and you have a market that is ripe for more gains. Specifically, Levine looks for another short squeeze to manifest itself early this week, boosting the market to the $5.20 level at a minimum. On the downside, it would take two consecutive closes below $5.00 to dampen his bullish enthusiasm for this market.

But while Cooper looks for lower prices and Levine for higher, Tom Saal takes a more wait-and-see approach to the market. Specifically, he notes that the “Greenspan Downtrend” was broken by Thursday’s rally, leaving the market to grope for new price clues. “Be patient and let the market inform us of the next price move,” he wrote in a note to clients Friday. (Note: Saal terms the recent move lower the “Greenspan Downtrend” because it began just days after the Fed chairman first sounded the alarm over natural gas supplies (see Daily GPI, May 22).

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