Shrugging off lingering technical bullishness, the natural gas futures market tumbled lower Thursday as traders adjusted their positions in reaction to slightly bearish supply news. Light trading volume at Nymex due to traders’ observance of Yom Kippur was seen as adding to the price volatility, with the November contract carving out a wide, 41-cent trading range. It closed for the session at $13.103, down 42.1 cents for the day.
According to the weekly storage report released Thursday by the Energy Information Administration, working gas levels in storage ended last week at 2,987 Bcf (Oct. 7), up 58 Bcf from the previous week. At the end of the same week last year, there was 3,149 Bcf of working gas in storage and the five-year average for this time of year is 2,953 Bcf.
At 58 Bcf, the storage report fell near the top end of the 50-60 Bcf range of industry expectations. The Wednesday afternoon ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, predicted a 55.1 Bcf injection.
“This report is no surprise to me,” said Tom Saal of Commercial Brokerage Corp in Miami. “Injections are going to be the market’s primary objective from now through the end of October. Even once the withdrawal season begins, the market will likely hoard inventories. There is just too much concern about lost production following the hurricanes.”
While some would suggest that higher storage inventories would produce lower prices, Saal has a different view. “This focus on storage will keep cash prices strong, which will lend support to the futures market through the end of this year,” he said.
However, local traders in the pit at Nymex have a decidedly short-sighted outlook and for them the report was bearish. “The locals were the best sellers right from the get-go [today],” Saal continued. “They sold it right before and immediately following the storage report release. But when they turned to cover those shorts, there were no buyers to be found. There was no liquidity and they got sucked up in their own wake. The market moved right back up in a matter of minutes.”
However the market still felt heavy, and buyers were reluctant to fully endorse the short-covering rally. An additional helping of slightly bearish supply news added to the downward pressure. According to the Minerals Management Service, the volume of gas offline following the hurricanes decreased by more than 4% to 5.67 Bcf/d Thursday from 5.92 Bcf/d Wednesday. By the 2:30 p.m. close, sellers were successful in retracing the locals short-covering rally.
Looking ahead, observers see the market priced at a tenuous level. Because prices tested lower and then briefly returned back to the $13.45-56 “value area” which comprised 70% of all of Wednesday’s trades, Saal believes the market may be poised to go higher. Confirmation of this would come on a break above the top of that range at $13.56, he explained.
However, Tim Evans of IFR Pegasus in New York fears that by settling below Wednesday’s $13.365 low, the November contract has set itself up for “another look at the psychological support at 13.00 and the $12.70 low from Monday.” He may have a point. With a low Thursday at $13.06, the November contract came close, but ultimately failed to fill in the gap down to $13.03 left on the daily charts by Tuesday’s higher open. If technical theory holds, that $13.03 level is now a target for would be market sellers.
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