Disregarding the bullish natural gas storage report, January natural gas on Thursday dropped significantly for a second consecutive session, reaching a low of $13.750 before settling at $13.781, down 89.8 cents for the day. This brings the two-day decline total to $1.597, while the week’s decline so far stands at 53.1 cents.

Coming in well above industry consensus expectations, the Energy Information Administration (EIA) reported Thursday morning that 202 Bcf was removed from underground stores for the week ended Dec. 9. The week featured colder than normal temperatures taking root in a number of key demand markets from the Midwest to the East Coast.

Looking at last year’s storage record, the EIA only reported one week with a withdrawal over 200 Bcf. For the week ended Jan. 21, 2005, the agency reported that 230 Bcf was withdrawn from underground stores.

After gapping lower in Access trading to open Thursday at $14.200, January natural gas was goosed from $14.250 to $14.650 in the course of two minutes following the 10:30 a.m. EST release. The prompt month soon after put in a high for the day of $14.920 but receded from there throughout the afternoon.

Prior to the report, industry estimates for the withdrawal ranged from 124 Bcf to 205 Bcf, with a majority of insiders looking for a pull in the 170-190 Bcf range. The 202 Bcf withdrawal had little difficulty tripling last year’s withdrawal of 65 Bcf. More importantly, the report nearly doubled the five-year average pull of 104 Bcf.

“The market seems to be doing everything that is contrary to what it should be doing,” said Steve Blair, a broker with Rafferty Technical Research in New York. “Should the market have gone higher on that storage number? Yes, and it did initially. I think the market is in a profit-taking liquidation and a sell-the-fact type of mode on the weather. I think that little blip up we got on the storage report gave some people some room to sell into it.”

Blair noted that some interesting trade patterns can develop as the end of the year nears. “If you believe that a lot of these funds that were short may have flipped their positions on this up move, then the smart thing for them to do now is to take some profits and get the [heck] out before the end of the year,” he said. “Lock it in and say ‘thanks a lot’ for the little cash cow you gave us at the end.”

On the fundamental side of the coin, Blair said a large withdrawal in a market that is fearful of supply shortages over the winter does not bode well in the long-term for bears. “We could maybe see this market go down a little bit more, but at some point I think we are going to see the buying come back in,” he said.

Blair said major support resides around $13.200 with the next level down around $12.450. “A close under $13.200 and this thing could be in for another nice little ride to the downside,” he said, adding that he expects trading on Friday to end on a “weak note.”

IFR Energy Services analyst Tim Evans said the market’s reaction to Thursday’s sizeable storage report spoke volumes. “The 202 Bcf net withdrawal from U.S. natural gas storage was at the top of the range of expectations, but it has certainly had only a limited impact as far as driving prices,” he said. “The inability of the market to turn this news into a solid gain is an indication of the degree to which natural gas is already overbought and overvalued.”

Evans added that downward pressure on prices was being maintained by the less intense overall temperature pattern both this week and in the forecast, as well as a National Weather Service’s long-range forecast, which still sees more warmth in the West than anything else for January through March.

ICAP Energy broker Brad Florer said the initial bump higher on the number was due to poor storage predictions. “I think the majority of the market was way more concerned that this number was going to come in lower than anticipated, and of course it came in a bit higher,” said Florer. “I think the reason we saw this market come off Wednesday was longs were taking profits ahead of the number due to these concerns. The number came in higher than expected, so the fear discount of a small number was immediately erased.”

However, Florer feels that there are market impacts of prices at current levels that have not fully been factored. “After traders scrutinize the report, I am not quite sure what [traders] are going to end up gleaning out of it. I think demand destruction is still a huge issue in this market and I am not sure it has been addressed fully.”

Florer added that the large withdrawal was an early holiday gift to bulls. “This obviously gave bulls a reason to dig in and try to recapture momentum,” he said. “Regarding the 40-cent jump on the number, I am not sure that is even material anymore. In fact, I am not sure a buck is material anymore either. [Trading activity] is thin out there and we are basically in uncharted waters up here. When it is swinging back and forth like this, I think you are shaking out a lot of the players who aren’t playing for the long-term. In a market like this you can be a hero one minute and cratered the next.”

Looking at the futures market long term, Florer said there are some things to consider. “On Tuesday, the market put in an ‘island top’ on the daily bar, which always looks ugly.” The market gapped higher on Tuesday, and then gapped lower on Wednesday, leaving Tuesday’s trade action unconnected, which is a bearish chart formation.

However, Florer was quick to couch that statement. “As far as the trend and the overall momentum, the bears have a lot of work to do before they wrestle this thing away from the guys who are long.”

Colder temperatures have definitely acted as support during the first half of December. NY-based Weather 2000 said Thursday it has been the coldest first half of December in decades for the nation. Through December 14, the forecasting firm said Cincinnati, Pittsburgh and Newark haven’t seen Decembers this cold since 1958, while Chicago and Detroit are as cold as they’ve been since 1976.

Temperatures are expected to remain chilly in the East for a number of key gas demand regions, according to the National Weather Service (NWS). In its latest eight-to-14-day outlook covering Dec. 22-28, the entire eastern third of the country is expected to be colder than normal with the Southeast expected to be especially cold relative to normal. The rest of the country is expected to record above normal or normal temperatures for this time of year.

As of Dec. 9, working gas in storage stood at 2,964 Bcf, according to EIA estimates. Stocks were 195 Bcf less than at the same time last year and 107 Bcf above the five-year average of 2,857 Bcf.

Abnormally cold temperatures last week resulted in a 118 Bcf withdrawal from the East region. The Producing region recorded a 55 Bcf pull, while the West region removed 29 Bcf from underground storage for the week.

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