Two days and 40 cents higher appeared to be enough for natural gas futures traders for the short term as futures values returned to earth on Tuesday. The May contract sliced 18.1 cents off of its price to close the regular session at $4.096.

With bearish fundamentals still hovering over the market, the Thursday-Monday rally was attributed to a smaller-than-expected storage build last Thursday, a round of short-covering and news from the Energy Information Administration (EIA) that it is in the process of revising downward its U.S. natural gas production data for the month of January as part of a methodology overhaul (see Daily GPI, April 6).

An EIA director on Tuesday discussed with NGI the broad changes to its monthly production report, the EIA-914 document, which identifies production from major producing states as well as offshore. According to the EIA, there will be downward revisions in January’s data when the February report is released on April 30.

The EIA is a statistical unit of the Department of Energy, and it has uncovered a fundamental problem in the way it collects the data from producers across the country. According to Gary Long, acting director of the 914 report, the EIA plans to change its methodology this month, resulting in downward revisions in some areas.

“From some of the preliminary work we have done on the January [production] number, it looks as if we’ll likely see a slight revision downward in the Lower 48 total,” Long told NGI. “I think we’ll see a pretty fair drop in Louisiana. It might be 300-400 MMcf/d…something in that ballpark.”

According to the EIA’s 914 data released last week for the month of January, Louisiana showed the greatest month-to-month growth in output — 3.3% to 5.29 Bcf/d (see Daily GPI, March 30).

Long said the EIA started looking at the old methodology about a year ago. “What triggered the review was the data at the end of 2008 and the beginning of 2009 in Texas. There seemed to be a disconnect between December [2008] and January [2009],” he said. “As we looked at it some more and started to get closer to final data from the state, it appeared that we might be too high at the end of 2008 in Texas. At that time we decided we’d review all of our processes, which hadn’t been reviewed since we started the 914 in 2005. We brought in some outside folks who could be objective. One thing led to another and here we are.

“Basically, it’s a timing issue on two fronts — frequency and currency. We’re updating monthly instead of annually and we’re using data that is more current than we have in the past. The changes are both on the sampling side and the estimation side.”

The news was met with mixed reactions from the trading and analyst community. Some analysts were going on the record that the EIA revised production data would not alter the market’s fundamentals.

Citi Futures Perspective analyst Tim Evans said news of an EIA methodology shift and a downward revision in January’s production data may have contributed to the swing in market sentiment to the upside, but noted that the report is not normally “a focus of attention” for futures traders since it comes out with significant lag time.

“The March 29 report that announced the highlighted change in methodology, for example, only provided detail on U.S. wet gas production for January, a long look back for a market that sometimes devotes only a few minutes of reaction time to the storage data from the prior week,” Evans said. “Equity analysts more focused on how much gas is being produced by players in specific shale plays may have greater interest, but for futures analysts we think the data is useful only in providing a post mortem, not a more forward looking analysis.”

Responding to another analyst’s belief that the news does not alter the fundamentals, Hencorp Futures broker Tom Saal took the sarcastic approach. “Let’s see…an undetermined level overestimation followed by an undetermined level of underestimation of the entire U.S. domestic ‘supply’ of natural gas…one half of the supply/demand balance used by fundamental analysts. [That] does not change the pricing view of fundamental analysts? In my opinion, they must be assuming either a) an insignificant change in supply figures from EIA; or b) supply is not important?”

Addressing Monday’s run-up, Eric Bentley, a senior trader at Viking Energy in New York, said, “This looks like a strong case of short-covering.” He added that his contingent of black box and algorithmic traders wasn’t quite ready to step back in on the short side after having played the downtrend so successfully. “They will wait until the May [contract] pops higher, and there is more potential [downside]. The offers were pretty thin, and traders are looking at $4.350 and $4.425 as possible points to renew shorts.”

May reached a high Tuesday of $4.334 before quickly reversing lower.

As if that were not enough for traders to digest, major eastern energy markets are in the midst of a heat wave at a time when weather-related demand is thought to be nominal. “Impressive April heating will continue for the next three days on the East Coast with widespread 80s and the potential for some low 90s (especially far southern Mid-Atlantic),” said Matt Rogers, president of Commodity Weather Group, in a Tuesday morning six- to 10-day weather update. Rogers concedes, however, that “for the East, confidence is lowered today for the six- to 15-day due to big changes in the European [model] guidance that are considerably cooler (especially in the Northeast).”

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