After digesting and dismissing a larger-than-expected storage withdrawal report in morning trade and testing $8 resistance-turned-support, February natural gas futures did an about-face to the upside just before noon EST on Thursday. Fueled by talks of further interest rate cuts, the contract notched a new $8.280 high for the move before settling the day at $8.259, up 16 cents from Wednesday’s finish.
One week after reporting a smaller-than-expected withdrawal, the Energy Information Administration’s (EIA) natural gas storage report Thursday morning revealed a pull of 171 Bcf for the week ended Jan. 4, which was in line with some expectations and greater than others.
After trading at $8.090 just prior to the 10:30 a.m. EST release, February natural gas futures put in a $8.125 high in the minutes that immediately followed. As of 11:10 a.m. EST, the prompt-month contract had retreated to the day’s low of $8.010. However, after Federal Reserve Chairman Ben Bernanke implied that further interest rate cuts may be necessary to support the U.S. economy, the prompt-month futures contract pushed higher. Bernanke said that the central bank stands “ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”
“Bernanke’s concerned comments could have had a lot to do with the jump in natural gas prices Thursday,” said a Washington, DC-based broker. “His comments were enough to spark the stock market up 200 some points as of 3:30 p.m. [EST]. All of the energies rallied off of the news, but the liquids have a lot of other issues to focus on as well, which likely quieted some of the moves. While a weak economy is already factored into the market, the idea that there may be somebody trying to do something about it could have lifted prices.”
Elaborating on the day’s action, the broker said that in choppy sessions, the “trend is your friend” statement comes into play. “While clearing and settling above $8 on Wednesday was psychologically important for the bullish case, I think we are still seeing range-trading here,” she said. “Looking at the perpetual chart all of the way back to 2006, the natural gas futures market has basically been range-trading between $5 and $9. That said, I think all we are seeing here is another trip to the upside of the range.”
The broker added that short-covering appeared to be the call of the day. “Going into this winter, everybody and their brother thought prices would be punished with this warmer weather and the healthy storage levels,” she said. “The fact that prices did not plummet has caused nothing but short-covering because it gets pretty expensive to be wrong after a while. Our producer customers have been coming out of the woodwork selling, but it has not been enough to force prices lower. Our marketer and end-users all have their hands in their pockets because they aren’t going to buy it here if they haven’t bought it earlier. It almost appears that nobody believes this market is going to stay here, so contrarians are laughing all of the way to the bank.”
As for the storage report, traders and analysts largely viewed the sizeable withdrawal as already being factored into prices. The 171 Bcf pull was larger than the Reuters survey’s average withdrawal expectation of 155 Bcf, and was almost larger than the high end of the survey’s range, which spanned 120-173 Bcf. However, a few estimates were above the report. Golden, CO-based Bentek Energy’s flow model indicated a withdrawal of 176 Bcf. The actual number well outpaced last year’s adjusted withdrawal of 49 Bcf and the five-year average withdrawal of 71 Bcf.
Citigroup analyst Tim Evans noted that while the number was bullish by historical comparisons, “the key for the market here is whether the big drop was already discounted as part of the price rally over the past two weeks. The 171 figure was somewhat higher than the consensus estimate, but it is not a ‘wow!’ figure.”
Other market experts agreed, noting that they also believe the upside in futures may be close to running its course. “Yes, it was a large withdrawal, but the market’s muted reaction is very telling. I think traders had already factored in a significant withdrawal, which is why we are not seeing much here,” said Commercial Brokerage Corp.’s Ed Kennedy. “Weather is still king here. While temperatures will get colder and closer to normal next week, they will still be above normal for the time of year. The forecasters are still calling January on the whole as warmer than normal and I think that is catching some people by surprise here.
“On the price side, we are finding producers perfectly willing to scale up-sell here, so I think we are getting toward the top end of the trading range and that is all that we’ve got,” he said. “I would look for prices to get back to reality probably during the early part of next week, barring a significant change in the weather forecast. I think we could see some support come in around $7.500.”
While it does appear that temperatures will get colder for the second week of January, the question is will it be cold enough. “There are strong indications today that the second half of January will average considerably colder than the first half of January for the United States and for southern Canada,” said Daniel Guertin, an analyst with Lehman Brothers. “Therefore, the month as a whole will not continue to average 15-20% warmer than the 30-year normal. Taking into consideration the temperature pattern so far this month and the forecast going forward, the month as a whole is forecast to average 6-8% colder than the 30-year normal.”
As of Jan. 4, working gas in storage stood at 2,750 Bcf, according to EIA estimates. Stocks are 282 Bcf less than last year at this time and 122 Bcf above the five-year average of 2,628 Bcf. Following significant cold in the East last week, the region led the charge by removing 93 Bcf. The Producing region withdrew 58 Bcf and the West region pulled 20 Bcf.
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