With the exception of a few upticks, the cash market responded as expected Wednesday with declines ranging from about a nickel to more than 80 cents. The West, which had been firmer than other market areas in the first couple of days of the week, led the shift in the other direction with most of Wednesday’s largest losses.
Colder weather was expected to supplant mostly moderate to seasonal conditions in several market areas before the weekend ended, which helped mitigate Wednesday’s softening. Low temperatures have been around in a large portion of the West for awhile now, but a high-linepack OFO by SoCalGas acted as a depressant on regional prices.
The biggest news of the day by far was the report of a much bigger storage withdrawal than expected — so much bigger, in fact, that it immediately drew speculation that there might be an error and a revision might be forthcoming this week.
The Energy Information Administration said 49 Bcf was pulled from storage during the week ended Nov. 19, a volume that handily surpassed all prior expectations as well as the year-ago and five-year average figures. Despite the fact that storage levels remain comfortably large early in the heating season, futures traders reacted highly bullishly to the report, sending the December contract skyrocketing immediately on its way to a stupendous expiration-day gain of $1.183, despite some backtracking prior to a huge late spike.
Those traders at Nymex who weren’t already on holiday likely were also watching Wednesday morning’s oil-related inventory reports from the American Petroleum Institute and Department of Energy, both of which agreed that heating oil stockpiles had declined for the 10th straight week. That was an ominous signal of potential shortages in the event of a colder than normal winter, which likely would send gas prices climbing into the stratosphere.
In an e-mail announcement of the storage pull, Citigroup analyst Kyle Cooper added a note: “This seems to be an error. However, a revision next week is considered possible.”
IFR Energy Services’ Tim Evans, who had been calling for a 5-15 Bcf injection, also speculated that the storage number might be incorrect. “What we don’t know is where the gas went,” Evan said. “Temperatures were warmer than they had been the week before, when only 6 Bcf in storage gas was used.
“The reliance on storage gas occurred in spite of cash prices that were generally at vast discounts to the futures market. In short, the data doesn’t make a great deal of logical sense and we’re still waiting for a footnote from the DOE to explain whether there was a revision to prior totals or some kind of reclassification. Otherwise, it just looks like someone left the windows open and the furnace on.”
Stephen Smith of Stephen Smith Energy Associates had predicted a 14 Bcf withdrawal. However, he also noted that the seasonal average withdrawal from 1994 to 2003 was 52 Bcf.
NGI checked with EIA’s Bill Trapmann, who defended Wednesday’s estimate, saying it reflected all the information EIA had up to the time it was published. If any revisions were to come in later and if they exceeded 7 Bcf, the correction would be made with the next storage announcement this week.
Needless to say, people on the purchasing end of gas transactions were upset by the report and screen spike. “We have some very angry customers,” said a marketer who buys supply for several end-user clients. “Speculators will be the undoing of this business.”
Sounding much like he was echoing Evans’ arguments (above), the marketer continued, “We can’t imagine who could have been taking all that gas out of storage because we’re swimming in gas up here. That’s brutal about how it [storage report and futures spike] affects everybody.”
One source theorized that mandated withdrawals may have been behind the big EIA volume. Saying he didn’t have specific information on utility and/or pipeline policies, the source added that he believes some storage operators require phased withdrawals through the course of the heating season, which means that some traders might have had to take some gas out of storage whether they wanted to or not.
A Midwestern marketer reported making her first swing purchases in several days because “it’s cold here today with a chance of snow later on.” She commented that the possibility of a revision in the storage report this week “won’t do us any good, because it would come too late to affect the big jump in futures today that will drive bidweek prices higher.”
Bidweek was proceeding on a somewhat shorthanded basis with many traders either out already for Thanksgiving or leaving early Wednesday for the holiday. Thus the biggest impact from the futures fireworks is expected to occur when traders return to their offices Monday to assess the situation more clearly. More than once Wednesday sources told NGI they didn’t have time to talk because of how the screen had upset bidweek strategy. A Northeast trader was typical in saying, “It’s getting a little crazy here as we get close to settlement, so I’ll have to call you back.”
It was getting obvious as the December futures expiry approached that cash-screen convergence wasn’t functioning very well this time. Then the expiration-day blowout at Nymex expanded the spread to ridiculous proportions. The final December settlement of $7.976 was a whopping three dollars-plus higher than Henry Hub’s average of $4.95 Wednesday.
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