In a textbook display of just how large an impact the weekly Energy Information Administration (EIA) gas inventory report can have on the market, natural gas prices plummeted Thursday moments after the EIA said that a hefty 111 Bcf was added to underground storage facilities last week. After a quick dip lower at 10:30 a.m. EDT, sellers took a moment to catch their breath, but bulls could not muster much of a rally. Bears made use of their second wind to punish prices lower again Thursday afternoon. The August contract finished at $5.258, down 26.2 cents for the session.

According to the EIA, storage increased 111 Bcf to 1,773 Bcf during the week ending July 4. Because the 111 Bcf addition was greater than last year’s 67 Bcf refill, last week’s 97 Bcf refill and the general 95-100 Bcf range of market expectations, it was universally considered bearish by market watchers, traders and analysts.

Gas stocks are now 580 Bcf less than levels at the same time last year and 317 Bcf below the five-year average of 2,090 Bcf. While that may seem like an unavoidably bullish predicament, it pales in comparison to the year-on-year deficit of more than 1,000 Bcf that existed as recently as March. With 17 weeks left in the storage injection season, the market needs only to refill gas at the rate of 72 Bcf/week to reach the 3,000 Bcf comfort level by the beginning of the withdrawal season.

While the 3,000 Bcf threshold was deemed the top end of what was considered possible just a couple months ago, it now rounds out the bottom end of peak inventory expectations. “High injection rates will need to continue to overcome the current storage deficit. [But] storage appears to be on track to end the refill season slightly above historical norms at about [3,100-3,200 Bcf],” wrote Thomas Driscoll of Lehman Brothers in a note to customers Thursday. Driscoll’s prediction is based on the observation that over the past four weeks, weather normalized storage injections have averaged 4 Bcf/d above the five-year average refill rate.

Also adding to the selling punch Thursday were waning concerns that Tropical Storm Claudette would impact the major producing areas of the Gulf of Mexico. Earlier in the week, the market had built into the price level a premium on the fear that Claudette would intensify and, similar to Hurricanes Isidore and Lili of 2002, impact offshore gas rigs in the Gulf. However, at 5 p.m. EDT Thursday, Claudette had yet to achieve hurricane status (see related story), leaving market watchers to assume that even if she can turn to the north, she would lack the damaging winds necessary to cause shut-ins or otherwise disrupt production operations.

George Leide of Rafferty Technical Research in New York said the market should remain weak for both fundamental and technical reasons. “We lost some momentum [Wednesday] when the storm weakened and the market failed at the key resistance at $5.61. The longs really threw in the towel. With the storage number [Thursday] coming in dramatically higher than expectations, the market is poised to test lower,” he said.

Specifically, Leide looks to sell any rally from current levels and targets a down-formation line drawn off the daily continuation chart that comes in at $5.57 Thursday. Because the line loses roughly 4 cents a day, it will offer resistance for the August contract on Friday at $5.53 and on Monday at $5.49. On the downside, Leide would look to take profits on his shorts down in the $5.00-10 area. More buying is possible down to $4.85, he added.

While admitting that the short-term bias is to the downside, Tim Evans of IFR Pegasus in New York said the longer-term trend remains bullish. Accordingly, he has a buy-stop placed above Thursday morning’s Access high at $5.67. If filled, he will consider a $5.39 sell-stop to limit the risk on the long position.

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