After reaching the lowest levels since early March, the gas futures market got a boost last week from a smaller than expected storage injection and a downward revision to prior storage data on Thursday, which provided just enough steam for the September contract to end the week closer to its weekly high of $2.80 than Wednesday’s low of $2.64. However, September only managed to eke out a small 1.6-cent gain on Friday, ending the day at $2.761, just above its daily low of $2.755. Volume was light at 38,527, compared to 95,207 on Thursday.

The uninspiring performance Friday left many observers uncertain about future price direction. Traders went into the weekend with mixed views based on little fundamental news and not much new technical information.

Friday’s Commitment of Traders Report showed that the reportable non-commercials (funds) added another 5,011 contracts of shorts the week after July 30, bringing their total exposure to 31,916 contracts. It’s the largest net short position since Feb. 12 when the number of shorts was declining from the 62,643 peak on Jan. 22. While it leaves the possibility of a greater short-covering rally once upward momentum forces the funds into the market, it also still leaves open the possibility that there will be 30,000 contracts of additional selling. The direction clearly remains bearish.

However, Tom Saal of Pioneer Futures said other technical indicators tell him the downtrend is coming to a close. “We’ve been seeing some bullish divergence in our technicals, which means even though prices drifted lower during the week, the momentum indicators were going higher,” said Saal. “That’s textbook bullish divergence. That tells me that the downtrend is losing momentum, and in our market profile databases we’re also seeing where the downtrend may be running out of steam. The third thing is although we’ve made some new lows, we’ve been told the funds haven’t been doing a lot of selling lately after being the big sellers over the last month or so.”

The group that will push the market higher if prices begin to head in that direction will be the funds covering their short positions. As long as prices don’t drop, Saal believes the funds may be induced to begin covering their profits. “The closer we get to $3, the more likely they will start covering,” he noted.

“What’s also interesting is what the market didn’t do during the week,” he added. “It didn’t go down and test a lot lower numbers when it had the opportunity earlier in the week. On a weekly basis, we made a new low, but we settled closer to the high of the week at $2.80. That usually gives you a test of the high during the following week. I would feel more confident going home long, than going home short right now.”

However, the next storage report could prove troublesome for bulls. With a cold front moving through most of the country during the week and the cash market showing softer prices, there was more of an opportunity for storage holders to inject gas than during the previous week, which had near record heat and peak power generation.

Tim Evans of IFR Pegasus said he’s expecting storage injections to return to the 70-75 Bcf level, yielding a definitely bearish comparison with last year’s 46 Bcf injection for the week. Kyle Cooper of Salomon Smith Barney said he expects an injection in the high 50s Bcf, compared to a three-year average of 44 Bcf and a five-year average of 56 Bcf. And Thomas Driscoll of Lehman Brothers is forecasting a 60 Bcf injection.

“We expect the storage gap versus the five-year average to increase from 355 Bcf as of Aug. 2 to 361 Bcf (estimated injection of 60 Bcf versus a five-year average injection of 54 Bcf) for the week ended Aug. 9,” said Driscoll. “We expect the year-over-year storage surplus to decrease from 272 Bcf as of Aug. 2 to 288 Bcf for the week ended Aug. 9.”

Saal said he’s doesn’t believe storage injections will immediately return above the 60 Bcf level, mainly because of the way EIA estimates its weekly storage levels and because of the recent revision it made due to a change in the base month used to calculate storage. “We just had a revision to a sequence of numbers,” said Saal. “The numbers we had been seeing were based off a different base month. My guess is that the next sequence of numbers is going to be lower than the last sequence because they revised last week’s number downward.”

In an interview with NGI on Friday, EIA’s Roy Kass admitted that there is a widespread misconception about EIA’s weekly storage report and its estimation process. Many industry observers look at EIA’s data and react to it in the same way they did AGA’s data, but that’s probably not a good idea, said Kass. “It is not like the AGA number. They probably should not react to it in the same way,” he said. “Our estimation procedure is dramatically different from AGA. Not only do we use the weekly survey (a sample survey), which is confidential, but we use the monthly survey, which is confidential and goes to everybody (a universal survey).”

Through a complex estimation procedure that’s updated each month when EIA gets a complete month of actual storage numbers (the most recent is for the month of May), EIA derives a set of weekly numbers for the market that has a standard error of 52 Bcf. Although small in percentage terms (2%), that’s an enormous number in terms of weekly changes, especially when considering that an injection that is different from market estimates by as little as 10 or 15 Bcf can mean a huge run-up or decrease in price. Last week’s relatively small 12 Bcf revision, rather than the lower-than-expected 33 Bcf injection, according to some observers, was the main cause of the 13-cent spike in prices to a weekly high of $2.80.

“People do not understand it. The 12 Bcf difference was well within statistical noise, our standard error,” said Kass. “They are used to the AGA, which revised its estimation number that was based on this hypothetical number called ‘percent full’ and what ‘full’ was, and they changed that once a year.”

Kass said the EIA’s revision to the data from July 26 was made based on the need to provide an understandable comparison between the Aug. 2 data and the July 26 data. When EIA jumps to a new base month, it takes the actual data from all of the storage operators and the data from the operators in its survey sample and comes up with a new percentage ratio that will be used to determine its latest weekly estimate and the previous weekly estimate, so that there’s more of an apple-to-apples comparison between the two weeks.

EIA currently is accepting comments on its revision policy and Kass said there have been quite a few suggestions so far. The agency currently is exploring a couple of changes, including “smoothing” methods, he said. “Rather than doing a step function month to month, we’re looking at smoothing it in some way.” Presumably that could mean smaller initial revisions once a new base month of data is incorporated into the model.

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