February natural gas continued lower Thursday following the release of government inventory figures confirming traders’ estimates of an ever-growing surplus. The front-month contract broke below the $2.409 long-term support level from September 2009.

The Energy Information Administration reported a storage withdrawal of 87 Bcf for the week ended Jan. 13, about in line with expectations but well below the 162 Bcf and 228 Bcf pulls of the average in the last five years and last year, respectively. At the close February had dropped 15 cents to $2.322 and March had skidded 15.3 cents to $2.363. February crude oil eased 20 cents to $100.39.

The last time spot futures traded lower than Thursday’s $2.293 was nearly 10 years ago on Feb. 26, 2002 when the March contract notched a low of $2.278.

The recent freefall in natural gas prices is sending shock waves through the producer community. “All my producers refuse to buy put options. [They say,] ‘I can’t buy the $4 put strip for calendar 2013 and pay 38 cents/MMBtu. I would only be profitable right now if I had done that. That would give me a break-even [trade] of $3.62.’ Now the break-even is $3.40,” said a Washington, DC, broker.

“They are all in a bunker right now. Any producer who hasn’t sold by now is just gutting it out or drilling for oil. Producers are not going to shut in. They still have rigs drilling. If the choice is to drill and produce yet more gas, which we don’t have demand for, or don’t drill and be faced with a $10,000 per acre lease payment, the producer will opt to produce the gas so he can make the lease payment.”

From a technical perspective the broker asked, “How many days are you going to have where it’s down 5%?” He said Elliott Wave studies show natural gas prices in the third leg down of a larger five-wave pattern. “$2.15 would be the next possible objective for the third wave, and the third wave is the ‘big momma’ of the five-wave pattern. It is often the longest wave, but never the shortest,” the broker noted. Following the end of wave three, a wave four, would be corrective, and if the Elliott Wave methodology is correct, prices would begin to rise at that point.

The falling natural gas prices have had an impact on the power sector. According to Bloomberg, Energy Future Holding Corp., formerly TXU Corp., is having trouble meeting payments on the $45 billion debt utilized to effect a leveraged buyout in 2007. Credit default swaps traders are currently pricing in a 91% chance the company will not meet its obligations in the next three years. Currently they yield 21%, up from 15% in April. Low power prices derived from soft natural gas pricing are said to be to blame.

In near-term power trading, all seems OK for now. “They [TXU] were in the market today. They are still meeting their obligations and are OK for bilateral deals,” said an Electric Reliability Council of Texas broker.

The ongoing dynamic of an ever-increasing storage surplus fueled the march to lower prices. Estimates indicated that the storage surplus would continue to expand at an increasing rate. A year ago at this time a stout 228 Bcf was withdrawn, and the five-year average stands at 162 Bcf. Estimates for the week ended Jan. 13 varied widely but come nowhere close to either historical metric.

IAF Advisors in Houston calculated a pull of 81 Bcf, and a Reuters survey of 24 analysts revealed a sample mean of 90 Bcf with a range of 74-125 Bcf. Industry consultant Bentek Energy predicted a withdrawal of 76 Bcf.

Bentek’s earlier concerns appear justified. In a report Bentek said the number might come in higher and said it “considers the 76 Bcf withdrawal to have most of the risk to the high side. Storage withdrawals should be a lot stronger during this time of the year, but winter weather was not present on this storage week.”

All in all the number had little impact on a market determined to fall into a deep dark hole. One trader commented Wednesday prior to the report that “this market can’t get out of its own way. Depending on the [storage] number…we might have lower numbers still. I think a lot of [Thursday’s] report is already incorporated into the market, but even if it comes in a greater draw than expected, that’s not going to make any difference.” He added that the market might move lower once the number came out since it was just one more factor that would no longer be able to impede the overall trend lower.

For the moment, weather forecasts have stabilized and actually show some cool trends, albeit in the Pacific Northwest. “Below-normal temperatures are forecast over the northwestern U.S. and the northern tier of the central U.S.,” wrote WSI Corp. of Andover, MA. “Above-normal readings are anticipated over most locations south and east of Chicago. Anomalies are expected to average between 3-8 degrees below or above normal. [Thursday’s] forecast is colder over the northern tier of the country than it was [Wednesday].”

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