After dipping below $4 in anticipation of a bearish natural gas storage injection in Thursday morning’s report for the week ending March 19, confirmation that 11 Bcf was injected last week — two weeks earlier than normal — dropped April natural gas futures even lower before the contract closed at $3.981, down 12.4 cents from Wednesday’s close.
The April contract put in a low of $3.972 but was hovering around $4.010 just prior to the 10:30 a.m. EDT release by the Energy Information Administration (EIA). Immediately following the news, the front-month contract dropped to $3.952, and after a short-lived rebound of a few pennies dropped to a new low for the move of $3.940. The last time front-month futures traded lower than Thursday was back in late September 2009.
With $4 breached, a number of traders say the next target is $3.820, which represents a 61.8% retracement of the September-to-January move higher (see Daily GPI, March 25).
Commenting on the 11 Bcf storage build, one New York broker looked into his crystal ball to forecast the storage report for the week ending March 26. “From where I’m sitting, next Thursday’s storage report number is obvious,” he sarcastically said. “The last three weeks we’ve had draws of 111 Bcf and 11 Bcf followed by an 11 Bcf build, so next week it only makes sense that we’ll see a 111 Bcf build.”
In all seriousness, the broker told NGI that this year’s early switch to injections is foreboding for the bulls’ case. “Gas going back into the ground two weeks ahead of schedule could have some people redrawing their price support lines,” he said. “We’ll have to see whether returning demand can claim some of this gas.”
Citi Futures Perspective analyst Tim Evans called the injection “expected,” but he noted that the number was bearish when matched with historical comparisons and marks an early, bearish start to the storage injection season.
“We might get a try for a ‘sell the rumor and buy the news’ rally now that the figure is known, but with more bearish data forecast for the next two reports and no particular weather support the basis for a rally seems limited,” Evans said. “April options expiration on Friday and April futures on Monday will be the next focus.”
The 11 Bcf injection was just larger than most industry expectations. Going into the report a Reuters survey of 27 industry players produced a range of expectations from a 13 Bcf draw to a 25 Bcf build with an average expectation of a 9 Bcf build. Bentek Energy was projecting an injection of 10 Bcf.
The actual 11 Bcf build was especially bearish when compared to last year’s date-adjusted 2 Bcf draw and the five-year average draw of 36 Bcf.
As of March 19, working gas in storage stood at 1,626 Bcf, according to EIA estimates. Stocks are now only 28 Bcf less than last year at this time, but 121 Bcf above the five-year average of 1,505 Bcf. For the week the East Region withdrew 10 Bcf while the Producing and West regions switched over to injections with builds of 19 Bcf and 2 Bcf, respectively.
The weekly EIA report is the only real-time supply demand data available to the industry, and it is useful as far as it goes, but it doesn’t reveal how much of a shift in the balance is due to supply or demand factors. “That gas has to be coming from somewhere. Supplies are increasing, and as the rig count has moved up, we are indeed getting more molecules out of the ground,” said Kyle Cooper, managing director of IAF Advisors in Houston.
“From what I am looking at, demand is not all that bad, at least from a year ago. It’s not great, but it has improved a bit, so I don’t see it as a demand-loss situation; it is coming from the supply side. It’s not Canadian imports and it’s not LNG [liquefied natural gas] imports, so it has to be domestic.
“The way I segment the data it looks like mostly all the increase in demand is residential and commercial, with a small bit of electrical generation,” Cooper said. “Industrial demand is still quite weak.” He suggested that the greater demand from the residential and commercial segment came not from increased use of natural gas resulting from factors such as residential construction, but from “more people not working and staying at home.”
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