May natural gas futures on Friday stunned some market watchers as it recorded a lower high, a lower low and a lower close than Thursday’s session despite a laundry list of bullish factors swirling around the market. The prompt month traded between $9.830 and $10.045 before closing at $9.901, down 19.7 cents from Thursday but still 57.9 cents higher than the previous week’s finish.

“I think to a certain degree there is some significance to the fact that the screen closed below $10 for the week,” said Steve Blair, a broker with Rafferty Technical Research in New York. “It shows that the market was able to look beyond the current problem at the Independence Hub, which has suspended the production of approximately 900 MMcf/d. The interesting thing Friday morning was that Henry Hub prices were approximately 5-7 cents above the screen, which probably had something to do with the Independence Hub. I think it also highlighted the forecasts for some cooler weather coming early in the week and that some of the storage operators were putting some constraints on pulling gas out of storage. The strong cash market might have been a product of some of these utilities going out and buying physical gas on the market.”

Noting Thursday’s run-up near the $10.294 continuation chart high, Blair said he was surprised that futures failed to make a new high for the move. “We got up to $10.290 on Thursday, but the push lacked the oomph to get over the hill. With the Independence Hub leak, the bullish hurricane forecast and a somewhat bullish storage report, I think it is definitely significant that we failed to move higher…and in fact ended up closing sub-$10.”

Citigroup analyst Tim Evans also noted that those three bullish pieces of news will be hard to overcome. “Natural gas has been lifted by three pieces of bullish news this week that have ratcheted pressure on those short the market to cover up their positions or even switch to the long side: Wednesday’s pipeline leak that shut off… [some] production from the Gulf of Mexico, the Colorado State University updated forecast that added two named storms to the outlook for the June-November Atlantic hurricane season ahead, and then Thursday’s [Department of Energy] storage report, which confirmed the emergence of the first year-on-five-year average inventory deficit in nearly four years,” he said in a note to clients. “We remain concerned that the natural gas market may be somewhat overvalued already, but there is no denying that the latest developments for the market have been bullish, not bearish.”

Thursday’s 14 Bcf storage withdrawal report for the week ended April 4 put supplies at a thin 1,234 Bcf, and analysts contend that robust pricing will be necessary to attract supplies to bring season-ending stocks to near 3,000 Bcf by the end of the injection season. Current supplies are 351 Bcf less than last year at this time and 23 Bcf below the five-year average of 1,257 Bcf.

“While storage could still be described as close to its five-year average level, we do recognize the emergence of a deficit as a market milestone, the first time storage has been below the five-year average since June of 2004,” Evans said. “While the swing from a surplus of as much as 410 Bcf last July to the current deficit is a bullish accomplishment, the future of this trend is still in doubt, with the next two reports looking somewhat mixed.”

Ritterbusch and Associates analyst Jim Ritterbusch said some things need to happen in order for storage to be refilled for the heating season. “While our estimated 1,760 Bcf supply shortfall can be made up between now and November, a high pricing environment will be required in order to deter some demand and entice some LNG [liquefied natural gas] cargo movement away from Europe and Asia and toward the U.S.,” Ritterbusch said. He added that the market would likely show a “strong price sensitivity” to supply interruptions or weather developments, which would tighten supplies further during the spring and summer.

That high pricing environment may already be deterring demand. According to a New York market analyst, “The last time we saw contract expiration at $9 or higher, industrial demand fell dramatically within a couple of months by 3 to 5 Bcf/d.” He noted that “during previous expirations the economy was much stronger, so not only is there the prospect of price-induced demand destruction, but also a slowing economy-induced demand destruction.” April 2008 futures expired March 27 at $9.578.

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