October natural gas futures plunged Thursday following the release of inventory data that came in higher than what traders were expecting. The Energy Information Administration (EIA) reported a hefty 87 Bcf increase, above many analyst expectations and higher than what floor traders had anticipated. At the close October had retreated 16.1 cents to $3.878 and November was down 13.6 cents to $3.981. October crude oil added 49 cents to $89.40/bbl.

Traders acknowledged that there was a bit more uncertainty than usual in the latest storage report as demand had been reduced by the Labor Day holiday but at the same time shut-in production from the Gulf of Mexico in the aftermath of Tropical Storm Lee, estimated at 10-13 Bcf, also threw a curve ball into the analysis.

The range of estimates prior to the report’s release was wide. Citi Futures Perspective analyst Tim Evans calculated a plump 94 Bcf build, and Jim Ritterbusch of Ritterbusch and Associates was looking for an increase of 89 Bcf. At the other end of the scale, Kyle Cooper of IAF Advisors in Houston expected inventories to have increased 82 Bcf, and a Reuters poll of 22 analysts showed an average of 85 Bcf with a range of 76-100 Bcf. Last year a robust 96 Bcf was injected, and the five-year average is 79 Bcf.

Floor traders were expecting even less of a build. “We were looking for a number in the low 80 Bcf range, and I heard a figure as low as 79 Bcf, said John Woods, CEO of J.J. Woods and Associates in New York. Woods expects further weakness from here. “We could see the market trade down to $3.85 to $3.855. When the number came out there was no move higher. It went straight down from there.”

The sharp decline was expected given the magnitude of the increase, but some see the market response in the next day or two as key. “The build was in the upper part of the range of expectations and has sparked a bearish price reaction, but since it was less than the 94 Bcf our model had produced, we think it could have been worse,” said Evans. “The key for prices will be how much damage this inflicts. If the downside proves limited and price recover later…[Friday], then passing the test could lead to a move higher in our view.”

Some see a buying opportunity. “We are advising our [end-user] clients to accumulate a position comprised of fixed-price contracts as well as protective call options,” said Tom Saal, vice president at Hencorp Futures in Miami.

Saal noted that market volatility had diminished as futures prices had meandered within a narrow trading range and suggested that purchases of $5 call options should be suitable upside price protection. Saal is a student of Market Profile and said there was an untested “value area” from two winters ago at $5.25 that could act as a prominent price objective if the market were to embark on any kind of significant advance.

According to Market Profile methodology, value areas are frequently targets for market advances or declines. In Saal’s trading they find application on a daily basis. In a morning note to clients he said “look for the market to test [Wednesday’s] value area [$4.079 to $4.004] then test [the] value area [$3.910 to $3.876].” October futures opened floor trading at $4.040 and settled at $3.878.

Prior to the market’s open, analysts had seen the market wrestling with a short-term bullish weather dynamic. There is lingering summer weather in the tropics and early winter along the Canadian border. “The bottom line is that we could be seeing the worst (or best from the other perspective) of the shoulder months: winter and summer both increasing energy demand in parts of the U.S.,” said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm. “Traders were not sure if they were buying [this week] for an early winter or a late summer, but it might not really matter. We could actually get a boost from one, the other or both.”

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