Gas futures traders slapped down the near-month contract 50.4 cents Thursday to $5.361 following the EIA’s report of a 117 Bcf weekly storage withdrawal and another day of mild spring weather. Market prognosticators had been expecting a weekly storage withdrawal of 100-150 Bcf with most calling for something between 120 Bcf and 145 Bcf.

“No question about it; it was on the low side,” said Jay Levine of Advest Inc. “But quite frankly it really didn’t matter. The market has been under pressure,” he said in somewhat of an understatement — gas futures have fallen $4.74 in only 12 trading days and the free fall has shown little sign of slowing down. This week started with a 48 cent drop. On Tuesday, April crashed another 57 cents and on Wednesday it slowed to only an 8-cent tumble.

“Had we had a bigger [storage] number, we may have had a little pop [up] and then a sell-off, but the market is trying to find a base, some level that will bring in some buyers,” said Levine. “Temporarily, it’s definitely on the defensive, but it’s also very oversold, so some place down here it’s going to have some kind of bounce.”

The storage situation most likely will be the trigger mechanism for that bounce when it does occur. The weekly storage withdrawal was on the low side of expectations but was larger than the 91 Bcf withdrawal from last year and the 63 Bcf five year average for the same week in March. The EIA said that as of March 7 there was 721 Bcf of working gas in storage, 1,007 Bcf less than the same time last year and 655 Bcf less than the five-year average.

Working gas levels are 56% below the five-year average in the East, 52% less than the five-year average in the Producing region and 5% below the five-year average in the West. In total, working gas levels are only 24 Bcf higher than the record low of 697 Bcf set on April 12, 1996, according to EIA data.

Nevertheless, with the spring warm-up across most of the United States, storage withdrawals could diminish rapidly over the next few weeks. Over the last five years, working gas levels have fallen an average of 60 Bcf over the last three or four weeks of the withdrawal season (last year there was a net withdrawal in the first week of April).

“The bulls can talk about storage and next winter all they want but all those bullish scenarios are no longer right in front of us,” said Tom Saal of Commercial Brokerage Corp. “They are several months away.

“What caused the price to go up is causing the price to go down: it’s the weather,” he said. “Looks like you are finally going to get some nice weather if you don’t have it already. I think it’s as simple as that.”

However, Saal admitted that the market is definitely oversold at this point. “Most of my clients are buyers and I’ve been telling them to wait. We’re coming up on a major trendline around the $5.10-15 area. We’ve gone through some trendlines here, and we’re waiting until it tests the next one.”

April settled below a 40-day moving average at $5.939 on Wednesday and stayed below it again on Thursday. Saal believes that may bring in additional fund selling on Friday. “Some of the funds have contrawhipsaw rules that say it has to settle below the 40-day for two days or more [before selling kicks in]. A whipsaw would be if it settled below the 40-day one day and then the next day it settles above it. The rule is there so you don’t get chewed up.”

Levine said his “worst case scenario” downside target is $5.00. “There’s a lot of uncertainty and that’s, quite frankly, one of the reasons why I’ve been suggesting options plays even though I don’t like to pay up for volatility. It’s the safest way of making a play and knowing that you’re not going to lose your shirt.” He said if you want to play the short side of the market, a bear put spread is a legitimate way of doing it.

“It’s less sexy than an outright futures or options position, but right now sex appeal is not what you’re after; you’re after safety.” To execute a bear put spread, an options trader would buy a higher strike put and sell a lower strike put. For example, you would buy a $5.50 put and sell the $5.25 put. The maximum you could make would be the difference between the strike prices less what you pay for it.

In exchange-related news, Nymex reported that it would reduce margins on natural gas futures, Henry Hub swaps and natural gas e-miNY(sm) futures contracts, at the close of business Thursday. The exchange is reducing the margin rates on the spot month futures contract to $10,000 from $12,500 for clearing members, to $11,000 from $13,750 for members, and to $13,500 from $16,875 for customers. Margins on the second month will be decreased to $8,000 from $10,500 for clearing members, to $8,800 from $11,550 for members, and to $10,800 from 14,175 for customers. Margins on all other months will remain unchanged.

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