The Energy Information Administration (EIA) reported Thursday morning that a smaller than expected 10 Bcf was withdrawn from underground storage fields for the week ended March 31, the traditional end of the heating season. As a result, the currently range-bound May natural gas futures contract dropped lower to settle at $6.972, down 9.7 cents from Wednesday.

The withdrawal was smaller than most industry estimates and the five-year average pull of 14 Bcf. The EIA recorded a 1 Bcf injection during the same week last year. With 1,695 Bcf of working gas left in storage, the 2006 season-ending level goes down in the books as the second largest amount since natural gas futures began trading on the New York Mercantile Exchange in 1990-91. Only 1991 — with 1,912 Bcf — had more gas in storage at the end of March, according to EIA’s Natural Gas Monthly.

Natural gas futures traders seemed to have had a larger withdrawal in mind, as evidenced by the prompt month’s knee-jerk reaction lower following the report’s 10:30 a.m. EDT release. In the minutes immediately after the report, May natural gas dropped from $7.220 to $7.090, followed by a $7.080 trade 10 minutes later. The contract recorded a low for the day of $6.93 in the minute prior to settlement. The $6.972 close was the first time a prompt month settled below $7 since the April contract did it back on March 22 at $6.953.

The ability of natural gas to drop a few cents was a surprise as crude futures continued to show strength. May crude gained another 87 cents Thursday to close at $67.94/bbl. In the current shoulder season, fundamental information on which natural gas traders can rely to make informed decisions is sorely lacking. Summer weather forecasts are not terribly reliable at this time of year, and the hurricane season is months away. Although there is no direct physical linkage between petroleum and natural gas, natural gas traders will often seek guidance from traders in the nearby crude oil and products trading rings.

IFR Energy Services analyst Tim Evans said the weather outlook continues to look bearish with the National Weather Service calling for above normal temperatures to stick around at least through mid month.

“This will continue to undercut heating demand in key markets across the Midwest and Northeast,” Evans pointed out. “We can expect relatively bearish storage data to follow, although at this stage there may be some opportunity for traders to treat the whole year-on-five-year average overhang of 650 or 700 Bcf as old news and something they can live with, at least as long as the heating oil market keeps its own inventory blinders in place.

“Natural gas remains a major battleground, with another new all-time high open interest figure of 663,514 contracts as of Tuesday’s close, suggesting that neither the bulls nor the bears are running for cover,” he said. “In fact, both sides are increasing their bets and it may be a simple matter of who runs out of money or nerve first…that drives the next big move.”

Floor traders are keeping a close eye on fund and managed account activity and sense lower prices. “Fund trading is what the market is all about now. We saw very little in the way of trade or commercial interest with this range-bound market,” said a New York floor trader.

While some estimates for last week’s storage move called for a net injection, most industry estimates had been looking for a withdrawal right around 20 Bcf. A Reuters survey of 25 industry players produced an 18 Bcf withdrawal estimate for the week, while the ICAP derivatives auction revealed a consensus withdrawal of 21 Bcf.

Following the report, working gas stocks were 447 Bcf higher than the same time last year and 654 Bcf above the five-year average of 1,041 Bcf. The East region posted the only withdrawal for the week, removing 15 Bcf from underground stores. The Producing and West regions injected 3 Bcf and 2 Bcf, respectively.

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