After spiking higher on the news that 123 Bcf was pulled from storage during the previous week, natural gas futures snapped back to unchanged as traders tried to get a better read on bullish weather forecasts circulating the market. After trading just above unchanged from Thursday’s close for much of Friday’s session, the February contract was boosted at the closing bell by a round of short-covering. It closed at $5.344, up 9.3 cents for the session, but 7.6 cents below its high for the day.

Working gas in storage was 2,417 Bcf as of Dec. 27, according to Energy Information Administration estimates. This represents a net decline of 123 Bcf from the previous week. Stocks were 572 Bcf less than last year at this time and 95 Bcf below the five-year average of 2,512 Bcf. In the East Region, stocks were 128 Bcf below the five-year average following net withdrawals of 68 Bcf. Stocks in the Producing Region were 13 Bcf below the five-year average of 677 Bcf after a net withdrawal of 29 Bcf. Stocks in the West Region were 46 Bcf above the five-year average after a net drawdown of 26 Bcf.

In addition to inducing a tightening of the year-on-year deficit (from 575 Bcf to 572 Bcf), Friday’s storage report also produced a withdrawal that came at the lower end of estimates clustered in the 120-140 Bcf range. After being shocked by larger-than-expected withdrawals of 162 and 159 Bcf in consecutive weeks in the beginning of December, the market has been undercut by lower-than-expected, back-to-back reports of 95 Bcf and 123 Bcf in the last two weeks.

“As feared, our estimation (129-139 Bcf) was slightly high with the actual report indicating a draw of just 123 Bcf,” wrote Kyle Cooper of Salomon Smith Barney in a note to customers Friday evening. “Even considering the Christmas holiday, this repeats an indication of the prior report that the bullishness apparent in the reports of late November and early December has been tempered.” This week’s storage report, he continued, while still price-constructive considering the heating degree days logged for the week, is much less bullish than recent reports, especially considering the price level. “It could be indicative of some demand loss in response to the price rise,” he continued.

Looking ahead, Tom Saal of Miami-based Commercial Brokerage Corp. is also dubious of last week’s price rally set in motion by weather forecasts calling for below-normal temperatures for the middle of the month (see related story). “Private forecasters have predicted an extremely cold weather pattern for the middle of January, and the market reacted as you might expect. However, this is not the first time they have called for Arctic air to push in the United States…. The last time they called for below-normal temperatures, it failed to show up and the market fell lower,” he said.

However, if these forecasts are correct and below normal temperatures are expected at the peak of the heating season, storage could easily become a very bullish influence as January wears on, chipped in Cooper. “It is very possible that a draw exceeding 200 Bcf occurs toward the end of this month. Therefore, it is considered likely that a retest of the recent highs near $5.50 occurs in the near future if the weather forecasts remain bullish,” he reasoned. At the same time, Cooper looks to take advantage of these historically high price levels. If the trend in withdrawals continues, he will look to sell out-of-the-money March call options.

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.