Amid mild weather forecasts and on the heels of another in astring of relatively small storage withdrawals, natural gas futuresprices tumbled lower yesterday as traders continued to liquidatelong positions. The selling was seen in two distinct surges —first on the open as traders increased their activity as pricesdipped to new 3-month lows and then again shortly after the releaseof fresh storage news, when the prompt March contract free-fell 15cents lower from 2:00 to 2:05 p.m. (EST). The March contract closedat $5.146, down 13.2 cents for the session.
According to the American Gas Association, 81 Bcf was pulledfrom underground storage facilities last week, leaving stocks 29%full at 960 Bcf. Against all comparisons, the 81 Bcf draw wasbearish, traders agreed. Last year at this time the market pulled136 Bcf from the ground and the 5-year average withdrawal for thisweek has been 113 Bcf.
Additionally, yesterday’s tally fell short of the 90-130 rangethat included nearly all market expectations, leaving basicallynothing positive for market bulls who have watched their profitstrimmed considerably since late December.
Several market watchers admitted being perplexed by thewithdrawal-a tally more indicative of mid-March than mid February.Based partly on heating degree-day tabulations that were 13.6%colder this year than last year and 15% colder than the 10-yearaverage, Salomon Smith Barney estimated that the American GasAssociation would report a 115-130 Bcf withdrawal. Futures brokersTom Saal and Ed Kennedy of Miami-based Pioneer Futures, meanwhile,were expecting a 103 Bcf withdrawal.
On closer inspection, however, last week’s storage figure maynot have been that much of an enigma. According to a Houston-basedrisk manager, the evidence lies not in the cumulative withdrawalfigure, but rather in the breakout across the regions.Specifically, he points to a scant 10 Bcf withdrawal in theproducing region for each of the last two storage reports as proofthat storage operators with recyclable storage rights are buyingspot February physical supplies to stick into the ground whileselling March futures. “This is a no-brainer for them. If you hadthe ability to do it, the economics definitely justified it. Thespread between Feb (cash) and March (futures) was about 12-14 centslast week. At a maximum carry charge of 5-6 cents, they still stoodto pocket 7-8 cents for a couple weeks work.”
Last year the producing area pulled out 31 Bcf and the 5-yearaverage draw has been 23 Bcf.
“What goes in must come out,” he continued. “This could make itreally difficult to place the physical molecule come March when allof that gas is forced back out of the ground. If the weatherdoesn’t show up in March and production stays strong, it could getugly in March.”
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