After pausing for fresh natural gas inventory news, traders returned pressure temporarily to the upside in natural gas futures Thursday following word that a smaller-than-expected 66 Bcf was injected into underground storage for the week ending Sept. 11. However, the rally gave out after reaching a five-week high of $3.900 as the October contract collapsed to close out the regular session at $3.458, down 30.2 cents from Wednesday’s finish.

Ahead of the report the October contract was trading at $3.615. In the minutes that immediately followed the prompt-month recorded the $3.900 high. Futures trailed lower for the remainder of the session, putting in a $3.442 low before closing out the day’s regular session.

Citi Futures Perspective analyst Tim Evans called the report “bullish,” noting that most surveys were calling for a build in the 70s Bcf. “The 66 Bcf net injection to storage was well below the consensus expectation and also beneath the 82 Bcf five-year average,” he said. “The year-on-five-year average storage surplus drops to 487 on the news. The question, in terms of price action, will be to what extent the rally of the past two weeks has already built in a bullish bias.”

“I’m scratching my head about this market. It is like we’ve returned to the days of five to 10 years ago when you saw a lot of these large moves,” said Gene McGillian, a broker at Tradition Energy. “The question is whether or not this really big increase in price volatility is a sign that the big downtrend that we’ve been in has finally turned as the market shakes off the bearish doldrums.

“For our immediate purposes, Thursday’s reverse lower brings the rallies of the last few months into account, where the market tries to breakout to the upside but ultimately fails and slinks back lower. Up until this rally we had three rallies of up to $1 each time the market hit a multi-year low, but each time it has failed because of the dismal fundamentals. Thursday’s action looks as if it might be yet another example of the recent pattern, but we need to put in more than one day of a turnaround to verify that is what we are seeing. However, the fact that we hit a new five-week high at $3.900 and then turned 50 cents lower is a good start.”

He noted that the United States Natural Gas Fund’s (UNG) roll from long October positions to long November positions has helped increase the recent volatility. The four-day roll ended Thursday. “There has been a lot of anxiety in the market because of the big UNG roll that was going on,” McGillian said. “With that over now, I think people on Friday will get a better feeling about what the pressures were that brought the market from $2.400 to $3.900. These guys were long and they put pressure on the market because everyone knows that they have to roll this big position. That is why we have all of this volatility.”

McGillian noted that UNG erased approximately 15,000 Nymex-sized contracts from their position during this roll, which he believes was the fund trying to keep the dollar value of their outstanding positions the same against their notational asset value. “The fact is they were doing a little more selling in October than they were doing buying in November,” he said.

The broker said the storage report Thursday really did not tell anything concrete about the supply-demand situation. “I don’t think the smaller than expected injection can be attached to the drastic reduction in rigs…at least not yet,” he said.

Going into the report most industry expectations were for a build in the high 70s Bcf, while some addition estimates ran as high as 86 Bcf. Bentek Energy was expecting an 68 Bcf build. The actual 66 Bcf build came in just above last year’s 65 Bcf build for the similar week but was well below the five-year average injection of 82 Bcf.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. said the wide range of expectations could be attributed to differences in sampling models. They noted that the Bloomberg consensus was looking for an 80 Bcf injection while some flow models were calling for something in the high 60’s Bcf. The analysts noted that the Bloomberg consensus did not pick up voluntary production shut-ins, which flow models should pick-up. “Remember, spot gas was $2/Mcf over the Labor Day weekend so [there was the] incentive for some to shut-in production,” the analysts said in a research note. “A mid-to-high 60’s injection…would suggest significant market tightening. Maybe a false positive from voluntary production shut-ins so be careful.”

As of Sept. 11 working gas in storage stood at 3,458 Bcf, according to Energy Information Administration estimates. Stocks are 496 Bcf higher than last year at this time and 487 Bcf above the five-year average of 2,971 Bcf. The East region added 45 Bcf and the Producing and West regions chipped in 11 Bcf and 10 Bcf, respectively.

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