After climbing by $1.018 in Wednesday’s market-shocking regular session, January natural gas futures aimed to take some of that excess back in trading on Monday.

The newly minted prompt month hit a low of $7.785 in Monday morning trading before climbing slightly in the afternoon. The January contract finished the day at $7.837, down 80.2 cents from Wednesday’s $8.639 settle.

Despite the action Monday, much attention was still being paid to Wednesday’s surprise rally and storage draw. At noon on Wednesday, the Energy Information Administration (EIA) reported that 49 Bcf was pulled from storage for the week ended Nov. 19. The number fell so far outside of anyone’s expectations — from a 25 Bcf withdrawal to a 15 Bcf injection — that market watchers were looking to the EIA for some sort of explanation (see Daily GPI, Nov. 29 ).

The EIA’s Bill Trapmann said that the agency has received a lot of calls and will “certainly look at anything and everything about [the report] to address it.” However, he added that the EIA has a policy of not correcting errors between its weekly reports, meaning the market will have to wait until at least Thursday to find out if the report was valid.

Stephen Smith of Stephen Smith Energy Associates said there has to be an error somewhere. “We believe that last week’s $1 rebound in futures was an over-reaction to celebrate the first good news for gas in over three weeks,” he said. “Either last week’s reported draw of 49 Bcf was incorrect or the prior week’s 6 Bcf draw was incorrect since HDDs [heating degree days] for these two weeks differed by only 3%. But it is unclear when the reporting error occurred.”

Smith noted that until the futures/cash gas price decline of the last few weeks, natural gas prices have paid little attention to the large storage surplus that had been building. He believes that this phenomenon was apparently based on the theory that no amount of fall storage could be excessive given the tight gas markets of today. “While there is some legitimacy to the recent nervousness about the adequacy of historical storage norms to provide an adequate cushion for winter — we simply believe that this concept was stretched too far,” he said.

“We believe that the January contract at $8.64 is now over-priced almost $2/MMBtus,” Smith surmised. “Gas storage is now about 384 Bcf over seasonal levels. Assuming normal HDDs for the rest of November and an additional cumulative loss of 30 Bcf related to [Hurricane] Ivan, then December-through-February HDDs would have to be a collective 9% colder than normal to reduce the current storage surplus to zero by the end of February. A ‘winter’ (Dec./Jan./Feb.) of this severity has occurred only two times in the last 13 winters.”

While a number of market watchers have been attacking the validity of the EIA’s storage report for the week ended Nov. 19, Commercial Brokerage Corp.’s Ed Kennedy had a different explanation for the run-up last Wednesday.

“Maybe more realistically, that rally may have had nothing to do with the EIA report,” he said. “I don’t think the funds pay that much attention to fundamentals. Since the buying was funds, it could have been more technically driven.”

Referring to Wednesday’s run-up as “rapid short covering by funds,” Kennedy said Monday’s drop off was the work of those very same funds.

With funds being strictly number driven, Kennedy said last Wednesday’s rally could have been funds feeding on buy stops. “Their numbers were hit and then they just moved,” he said. “Realistically, it could have nothing to do with the report. I know that there are some people out there that think that fundamentals are the only thing in the market and technicals don’t matter. That is just simply not true….Now the funds are right back in selling it again.

“There is also a little bit of illiquidity in the market, which you can see reflected over in the implied volatility in the options, which sky-rocketed on Wednesday,” he added. “I don’t think it will be coming down with this action today.”

Kennedy said the funds idea makes sense because with storage as full as it is, the only thing that is important at this point in time is the weather forecast. Even if a little cold does settle in, Kennedy said it won’t matter until there is a sustained cold snap. “There’s still plenty of gas in storage and there is no shortage of supply,” he concluded.

Released on Monday, the National Weather Service’s latest six-to-10 day temperature forecast is calling for a wide swath of cold to take hold in the West, Southwest and Midwest, while above normal temperatures should hit a majority of the East, including the entire East Coast.

Kennedy will be going into more depth on the complex natural gas futures market Dec. 8-9, when he will be teaming with Commercial Brokerage’s Tom Saal and Sandy “Trot” Goldfarb of Energylinks Futures LLC. These three well-known veterans of the gas world will go beyond the usual hedging and risk management tutorials to reveal today’s techniques for identifying price trends and market timing, including the use of both fundamental and technical market indicators.

The two-day workshop will take place at the Nymex in New York and will include the opportunity to have a bird’s eye view of the gas trading pit when the weekly EIA storage data is released Thursday.

For a complete program description, or to register online for the Workshop at Nymex, visit , or call 1-800-427-5747.

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