After tumbling beneath key support, the natural gas futures market broke to new two month lows late Thursday morning as traders chose to ignore a seemingly bullish gas storage report (featuring a 236 Bcf withdrawal). However, prices rebounded in the afternoon, suggesting a short-term bottom may be in place. The May contract finished at $5.40, down 25.4 cents for the session, but up an impressive 15 cents above its earlier low.

According to the Energy Information Administration, a whopping 236 Bcf was pulled from storage last week, depleting inventories to 1,827 Bcf. Not only was the withdrawal the largest so far this season, it easily exceeded nearly all market expectations clustered in the 200-230 Bcf range. It also easily trumped the year-ago and five-year average draws of 208 Bcf and 133 Bcf, respectively. At just 60 Bcf, the current surplus to the five-year average has shrunk appreciably from the nearly 200 Bcf buffer the market enjoyed for most of January.

However, given the choice of trending higher in reaction to the bullish storage news or lower in sympathy with the idea that moderating weather is not too far off, the market chose the latter Thursday morning. While medium-range weather forecasts suggest below-normal temperatures for much of the country for a large chunk of the month of February, market-watchers were quick to note that it would be hard for Old Man Winter to match his latest dispatch of arctic temperatures and record-setting wind chills.

“If we do get another blast of arctic weather, it will be cash prices and not futures prices that will move higher,” suggested Tom Saal of Miami-based Commercial Brokerage Corp. Although the futures market typically holds a small premium to the cash market, Saal noted that the end of winter is the one time of year that cash prices may move above the futures market.

“Unless it was a gargantuan number, the market was set to move lower,” said Saal, regarding the 236 Bcf storage withdrawal. “This was likely our biggest draw of the entire season but it fell short of last year’s 247 Bcf top draw.”

In daily technicals, Saal sees support in the $5.20-25 area, which represents the confluence of Thursday’s low and Saal’s estimate for the average cost of the gas currently in the ground. Psychological buying is likely in conjunction with the $5.00 mark.

Meanwhile, a Washington DC-based broker believes the market’s ability to rebound off the $5.25 low argues for a continuation to the upside Friday. “The market found solid support down there,” he said.

And while he sees prices moving back down to the $4.80 level this spring, the perceived supply shortage will likely keep the bears in check. “It has not been difficult to refill storage with the mild weather of the past two summers. If the temperatures really heat up, this market will have a chance to test the hypothesis that there is an inadequacy of supply…We might very well find out that Greenspan was right [about his supply concerns].”

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