Despite a bullish storage report (111 Bcf withdrawal) and a corresponding price spike at mid-morning, the natural gas futures market dropped lower for the third session in a row Thursday. While bulls still have plenty of ammunition left at their disposal, Thursday’s price action was a strong endorsement for the bears and traders look for modest softness ahead of the weekend.

The January contract finished near the middle of its wide, 60-cent trading range, down 9.6 cents at $6.615. Estimated volume of just 71,666 was low for a Thursday. While the light trading activity can be explained by the fact the holidays are approaching and hedgers have already locked in their winter requirements, bull traders suggest it is because bears lacked conviction Thursday.

According to the Energy Information Administration, 111 Bcf was pulled from storage last week, dropping inventories to 2,984 Bcf as of Dec. 5. Versus consensus estimates centered on a 96-110 Bcf withdrawal, the storage report was bullish. The withdrawal was also price-supportive versus the 59 Bcf takeaway announced a week ago and the five-year average draw of 73 Bcf. It was bearish, however when compared to last year’s whopping 162 Bcf drawdown. Storage now stands 190 Bcf above year-ago levels and 79 Bcf above the five-year average.

Looking ahead, most traders sense that the market’s inability to rally off the bullish storage data is an indication that it favors lower prices ahead of the weekend. “There was certainly no justification for [Wednesday’s] rally,” issued Steve Blair of Rafferty Technical Research in New York. “Odds here are that we will see another little push to the downside…. I doubt if we will break below the [Thursday’s] lows at $6.36, but we could drift down closer to that level.”

Tim Evans of IFR Pegasus in New York agrees, and having exited out of his long position this morning for a healthy gain, now looks to initiate a short position should the market drop to $6.24.

Craig Coberly of GSC Energy in Atlanta also sees better prospects in the short side of the market. “[Wednesday’s] trade had all the “earmarks” of a blow off that most likely completed this rally phase from the December low,” he wrote in a note to customers. Based on this conclusion, Coberly looks for prices to trade sideways to lower in the intermediate-term. In the longer-term, however, he feels this consolidation will form a launching pad for “another major rally.”

Meanwhile for some analysts, it is never too early to start looking at next week’s storage report. “Despite the cold core region condition early this week, with recent moderation, we expect little change in the next reported withdrawal,” noted Ron Barone of UBS. However, he noted that even if the EIA announces another 111 Bcf draw next Thursday, it would fall short of the year-ago withdrawal of 159 Bcf.

Nymex announced that margins for the natural gas contract would be increased at close of business Thursday from $9,450 for customers on the spot and second month to $11,475. Margins on the third month will be increased from $9,450 to $10,800. Margins on all other months will remain unchanged.

The EIA said Thursday that its last two storage reports of the year would each be released a day early on Wednesday between 12 and 12:10 p.m. EST. Next week, the data will be released at its regular-scheduled time on Thursday at 10:30 a.m. EST.

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