February natural gas futures continued testing lower price levels on Thursday, aided by an anemic 59 Bcf withdrawal in the Energy Information Administration’s (EIA) storage report for the week ended Jan. 11. The prompt-month contract breached psychological support at $8 before closing out the day at $8.081, down 5.2 cents from Wednesday’s finish.
In anticipation of a smaller-than-normal withdrawal from natural gas storage, February natural gas futures worked lower in Thursday morning trade prior to the release of the report. The hunch was proved correct when the EIA reported that only 59 Bcf was removed from storage, a number smaller than historical comparisons.
The February contract put in a low of $7.960 in the minutes that immediately followed the report before rebounding to a high of $8.175.
“While the withdrawal was mostly inline with expectations, getting a 59 Bcf withdrawal for a week in January is a little bit out of the ordinary,” said Steve Blair, a broker with Rafferty Technical Research in New York. “I think people are also keeping in mind the possibility of decent sized withdrawals in the next two reports, so traders have to look at the whole picture here.
“The market tested out under $8 twice on Thursday, which doesn’t surprise me. The market seems to be looking past the near-term six- to 10-day forecast models, which are calling for cold, and instead looking further out to the beginning of February, which shows above-normal temperatures,” he added. “Let’s face it, with the bitter cold they have out in the upper Midwest now and the cold that we are going to get in the Northeast this weekend and the beginning of next week, the market would normally be taking off to the upside. However, under the current conditions, near-term and short-lived cold blasts are not going to get this market running to the upside. Add to that the fact that we have enough gas in storage to absorb a couple of 150-200 Bcf withdrawals, and the market finds itself pretty comfortable.”
Blair said that while he was surprised the push lower didn’t go any further than it did on Thursday, there are some “pretty strong” support numbers right under $8. “Just like we had the same comfortability level over the last several months when we were ranging back and forth between $7 and $7.500, I think we have that same sort of comfortability zone now roughly between $8 and $8.500. I definitely think the market is comfortable here.”
While the actual 59 Bcf withdrawal was only slightly smaller than the industry consensus of a 60-61 Bcf pull, the withdrawal did come in well below last year’s 84 Bcf reduction and five-year average pull of 105 Bcf. In addition, the report was much smaller than the 171 Bcf withdrawal reported for the previous week.
“Although a reminder that it was warm last week, we think the market saw this low injection coming, so while the draw was less than the 105 Bcf five-year average it may not spark that much of a price reaction,” said Tim Evans, an analyst with Citigroup in New York. “Attention should quickly turn back to the upcoming cold and the warming trend to follow.”
The withdrawal was expected to come in on the light side due in large part to warmer weather and reduced heating requirements. The National Weather Service (NWS) reported that for the week ended Jan. 12 New England “enjoyed” just 162 heating degree days (HDD) or a stout 119 fewer than normal. New York, New Jersey and Pennsylvania received 137 HDD, or 123 fewer than normal, and the industrialized Midwest had experienced 152 HDD, or 143 fewer than normal.
Look for a much larger withdrawal next week. The NWS forecasts that for the week ended Jan. 19 New England will experience 259 HDD, or 24 fewer than normal, and The Mid-Atlantic will experience 245 HDD, or 19 fewer than normal. The Midwest will shiver under 289 HDD, or just eight fewer than normal.
For the moment the natural gas market may enjoy somewhat more clarity than the turbulent equity and petroleum markets. The weather/price connection seems to be in sync, and traders see the recent overall advance as expected. The natural gas market is the only market that’s reasonably predictable because it is trading like a weather market, and there is a much-below-normal six- to 10-day forecast out there, said a California broker.
As of Jan. 11, working gas in storage stood at 2,691 Bcf, according to EIA estimates. Stocks are 258 Bcf less than last year at this time and 168 Bcf above the five-year average of 2,523 Bcf. The East and West regions shed 29 Bcf and 24 Bcf, respectively, while the Producing region removed 6 Bcf for the week.
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