Despite a spirited rebound Thursday morning following the Energy Information Administration’s (EIA) report of a larger-than-expected 27 Bcf withdrawal, natural gas futures rotated lower in the afternoon, as traders took into account the latest round of bearish weather forecasts. December futures finished at $3.831, down 2.3 cents for the day and a whopping 18.9 cents off its high for the day. Volume in the pit was moderate to heavy with an estimated 93,031 contracts changing hands.

According to EIA estimates, there was 3,145 Bcf of working gas in storage on Nov. 1, which was down 27 Bcf from the previous week. Stocks were 7 Bcf less than at the same time last year and 138 Bcf above the five-year average of 3,007 Bcf. In the East Region, stocks were 11 Bcf above the five-year average following net withdrawals of 13 Bcf. Stocks in the Producing Region were 78 Bcf above the five-year average of 802 Bcf after a net withdrawal of 9 Bcf. Stocks in the West Region were 48 Bcf above the five-year average after a net drawdown of 5 Bcf.

The market was expecting anything from a 35 Bcf withdrawal to a 10 Bcf injection. Because the 27 Bcf withdrawal fell near top of that range, it was immediately deemed bullish. During the same week last year, 20 Bcf was injected into storage. Most observers expected the storage number to fall short of last year’s 20 Bcf refill. The only question was by how much and whether the supply shortfall would be enough to completely erase the year-on-year surplus, which as of last week stood at 40 Bcf. As it turned out, today’s report was bullish enough, and the market is now faced with a year-on-year deficit for the first time since May 2001.

While admitting that the storage report was supportive, Ed Kennedy of Commercial Brokerage Corp. in Miami was quick to downplay the significance of the season’s first withdrawal. “The only fundamental factor that matters from mid-November through mid-March is the weather and right now the forecasts are calling for chamber of commerce weather from Chicago to New York for the weekend. Temperatures are going to be in the 60s and that will translate into low heating demand, lower cash prices and lower prices on the board,” he reasoned.

Looking ahead to next week, the forecasts do not get any better for price bulls. According to the latest six- to 10-day outlook released yesterday by the National Weather Service, above-normal temperatures are expected across a large portion of the Northwest quadrant of the country as well as in the Northeast. Combined, those two swaths of warmer than usual weather constitute about two-fifths of the country, about twice the area — comprised of the Gulf Coast states — which is predicted to see below normal mercury readings over that same time period.

Contrary to the optimism displayed by ski resort owners, natural gas producers, and other lovers of chilly weather that this warm-up is just a brief Indian Summer, science suggests mild temperatures may be here to stay. According to a report released Wednesday by the National Oceanic and Atmospheric Administration (NOAA), the little El Nino that has been warming equatorial Pacific waters off the coast of Peru apparently grew up during the month of October. And while the group calls for the 2002/03 El Nino to be less severe than the 1997/98 event, NOAA expects much warmer sea surface temperatures this winter to lead to warmer than normal temperatures in the northern United States (see related story this issue).

In daily technicals, Kennedy chalks up Thursday’s rally to short-covering, and looks for more selling ahead of the weekend. “We were critically oversold and have been for the last few days. Sure we could move higher and fill in the [$4.035] chart gap, but I doubt we can move much above $4.10. I think we will see prices in the low $3.70s before we go home this weekend.”

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