With the realization that natural gas storage levels are likely to be at record or near-record levels this summer, natural gas futures on Friday finally broke through long-standing support in the $6.450 to $6.500 area while putting in a new low for the greater down move. June natural gas recorded a low of $6.225 before closing out the week at $6.280, down 36.9 cents on the day and 49.5 cents lower for the week.

Friday’s action erased the old $6.450 front-month low for the move, which was set on March 10. The down move began on Dec. 14, 2005, one day after the January 2006 natural gas contract recorded an all-time prompt-month high of $15.780.

With storage already sitting at 1,989 Bcf following Thursday’s report of an 85 Bcf build in inventory for the week ended May 5, current storage levels are near record levels for this period. The fact that storage locations around the U.S. are filling at a record pace is no secret.

Traders have been quietly discussing the national storage surplus and its ramifications among themselves and with NGI for some time, but Southern Natural Gas finally confirmed that indeed storage is filling up (see Daily GPI, May 12). The company announced earlier this week that its working gas storage capacity was more than two-thirds full barely over a month into the traditional seven-month injection season, and based on historical injection rates, the pipeline anticipates that available storage capacity may disappear by mid-summer.

“This was a very disappointing day for anyone who was bullish because we settled lower for the week and near the low for the week,” said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. “While we don’t have to talk about $6.50 any more as support, we can start talking about it as resistance now. It got beaten up pretty well Friday. We really saw the move mostly as fund selling.”

As for talk that the move was tied to the fact that storage is rapidly filling, Saal said he wasn’t buying that as a reason. “That information has been in the market for a month now. I think what we saw initially Friday was fund selling, which created the new low and triggered even more fund selling. The market is now right up on its long-term major trend line here at $6.20.”

As for a trading strategy in the current market, Saal said he continues to recommend options. “If you have to do something in a market like this, options are the way to go,” he said. “When implied volatility is low, the price of an option is low. Implied volatility has dropped significantly over the last couple of days.”

Rafferty Technical Research broker Steve Blair said the next big support number he sees is $6.17. “I’m still hard-pressed to think this thing is going to get below $6.00. I just don’t see it. However, as long as storage continues to reveal big injections each week, this market could take a bit of a dump.”

Commenting on the recent reports of storage filling up early, Blair said it is important to the markets because the country is going to get to a point where traders won’t have anywhere to put the gas. “People are talking about when storage gets to 3.2-3.3 Tcf, there is nowhere else to go with the gas. They are just forcing it in. If we get into that type of situation, these prices are going to drop pretty fast.”

One observer suggested that if prices do tank this summer it would be a good time to put cushion gas in new storage projects. The high price of the cushion gas has been a major factor in slowing construction of new storage.

Lack of supportive temperatures so far this season throughout much of the U.S., tied with the ever-increasing storage surplus, has left bulls on the sidelines for the most part.

Citigroup analyst Tim Evans said the 85 Bcf injected into underground stores for the week ended May 5 gives bears more motivation. “A rising year-on-five-year average surplus typically puts intermediate-term downward pressure on price.”

Despite mostly mild temperatures elsewhere, Texas is sizzling and, according to Weather 2000, other areas are expected to heat up in June. “In one of the latest rounds of preseason heat (that commenced on March 1st), Corpus Christi hit 103 degrees Fahrenheit [Wednesday] while Laredo, TX hit 112 degrees,” Weather 2000 said. “By May 10th, this was already the 8th day that Corpus Christi has broken 90°F (while they normally only do so six times the entire month), and typically break 100 degrees in May on one day every 10 years!”

The forecasting firm said the West-Ridge/East-Trough pattern that is more familiar during winter, but that also plagued May 2005, will stick with the U.S. through the medium term, further supported by a negative-phased NAO. “As we progress through May, we will see this pattern slowly transform into more of a trough-ridge-trough alignment, which we have believed will be the general theme for the June-September 2006 summer season. This places some regions on tap for a big warm-up by June, others for a big cool-down, and others for more of the same.”

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