Amid two momentous selling waves, natural gas prices tumbled lower in dramatic fashion Thursday, as traders looked past bullish weather forecasts to focus on the undeniably bearish supply situation. Sellers were fast out of the chute as profit-takers pressured the January contract to a gap-lower open. However, that was only the beginning. After it was announced that only 81 Bcf had been drawn from storage last week, the heavy selling resumed. The January contract settled at $2.555, down 12% or 35.6 cents for the day.

According to the AGA, 16 Bcf and 12 Bcf were withdrawn from the Producing Region and the Consuming Region West, respectively, with the Consuming Region East accounting for the remaining 53 Bcf. The net withdrawal of 81 Bcf for the country was more than consensus estimates in the 50-70 Bcf range but much less than last year’s 175 Bcf takeaway, as well as the five-year average draw for the week of 139 Bcf . At 2,980 Bcf, total gas in storage now stands at a record 1,042 Bcf above year-ago levels and 593 Bcf above the five-year average.

Looking ahead, market watchers do not see the surplus narrowing very quickly. “There remains for storage operators a huge disincentive to withdraw gas from the ground,” said Tom Saal of Pioneer Futures in Miami. “I estimated the average cost of storage gas to be about $3.50, and as long as spot prices remain below that, it just doesn’t make sense to pull from storage,” he said. After rocketing 32 cents Wednesday, Henry Hub December spot prices tumbled almost in lock-step with futures, down 31 cents to average $2.64 Thursday.

Saal said he was not surprised by the collapse. After watching futures rally more than 30 cents in just three trading sessions, they were prepared for an expiration-day sell-off. “We saw bearish divergence the last several sessions. While the market was making higher highs, Stochastics indicators were making lower highs. I am more surprised by how high the market spiked than I am by how much it fell,” he said.

“The rally was initiated by short-covering ahead of the holiday weekend. It also provided some hope for those traders who had bought over the last couple months on the way down and were hanging on for dear life hoping that the rally would put them back in the money. When the market turned lower [Thursday], they were forced to liquidate their positions,” Saal said.

A floor trader agreed, adding that a large marketing company had propelled the January contract higher Wednesday in the hopes that it would settle above $3.00. “Williams had bought a bunch of $3.00 call options and they were pushing for a $3.00-plus settle that would place those calls in-the-money. As it turns out, the market wouldn’t support it and they were forced to give up the ghost.”

The negative close seen in the January contract follows a December contract that probed as low at $2.17 on its expiration day before closing with a 29-cent loss for the session at $2.316.

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