November natural gas yielded to a larger than anticipated storage report Thursday and settled lower. The magnitude of the storage build caught many by surprise and raises the question of whether production estimates may be understated. At the close November had fallen 5.2 cents to $3.747 and December had retreated 2.6 cents to $4.015. November crude oil added 93 cents to $82.14/bbl.
Going into Thursday’s trading the question prior to the 10:30 a.m. EDT Energy Information Administration (EIA) report was “how big is big?” Traders knew all along that once injections didn’t have to compete with Gulf of Mexico shut-ins and high demand for summertime cooling, additions to storage were likely to be well above those of last year and five-year averages. The question was just how much above.
Market bulls got a rude awakening when the EIA reported storage additions for the week ended Sept. 23 of a whopping 111 Bcf, well above the 73 Bcf injected last year, the five-year average of 71 Bcf, and what analysts were expecting.
“I’m surprised that we will smash last year’s September injection figure. In September 2010 we injected 350 Bcf, and we are already at 303 Bcf for this month. The largest September injection within the last 10 years is 409 Bcf,” said a New York analyst.
The plump 111 Bcf build caught a number of market observers by surprise. “This was a clear bearish surprise that suggests the background supply-demand balance for the market has weakened relative to recent flows, with additional shale gas production the likely cause,” said Tim Evans of Citi Futures Perspective. “The market is more likely to remain capped by this additional supply.”
Evans had forecast an increase of 93 Bcf, and a Reuters poll of 28 traders and analysts showed an average 100 Bcf with a range of 91-110 Bcf. Industry consultant Bentek Energy, utilizing its North American flow model, predicted an even higher fill of 104 Bcf.
In making its projection Bentek hinted in a report that even with a 104 Bcf estimate, it may have erred on the low side. “A 104 Bcf injection would bring storage stocks to 3,305 Bcf, which is 98 Bcf below 2010 levels and only 2.0 Bcf below the five-year average. As temperatures have started to dissipate into more fall-like weather, injections have ramped up significantly during the past couple of weeks, putting inventories closer to historical levels. In the East, storage injections have averaged 10 Bcf higher every week in September. Inventories there hold the largest regional gap compared to historical levels.”
Short-term traders see a resilient market working lower. “I was surprised the way the market bounced back with the [storage] number being so high,” said a New York floor trader. “We traded below $3.70 when the number came out and I thought there would be more selling throughout the day, but at one point we traded from $3.74 to $3.81 in the early afternoon. The spreads came flying in with December-January going from 14.7 cents to 13.6 cents in 30 seconds.
“The market probably has some room to the downside, and the times when the market rallied may have just been someone trying to spook the shorts. I think the market can trade down to $3.60 in the next three to four sessions. If we get some high numbers next week, this market is going to have a tough time picking its head up,” the trader said.
High injection numbers next week may be challenged as forecasters are looking for the first incursion of cool air to hit the East.
“Once we get to Friday, a strong cold front will advance from the Great Lakes toward the East Coast. This front will serve two major roles. First, it will blast the humid air and the East Coast rain out to sea. Second, the coldest air mass of the young autumn season will surge southeastward by strong northwest winds,” said Elliot Abrams, meteorologist with AccuWeather.com, in his weather blog. “Downwind from the Great Lakes, lake-effect rain showers will break out. It’s even possible that in the highest elevations from West Virginia to New York’s Catskills the first snowflakes of the season may be seen in the middle of the weekend! The change to chill will not be permanent because milder air will spread east from the Plains early next week.”
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