April natural gas futures slipped a little lower temporarily in morning trade immediately after the Energy Information Administration (EIA) reported Thursday that only 55 Bcf was removed from underground storage for the week ended March 10. However, the prompt month came roaring back in the afternoon, recording a high of $7.370 before settling at $7.267, up 12.4 cents.
The withdrawal fell slightly short of most industry expectations and added to the significant gas storage surplus compared to historical levels. Trading at $7.200 just prior to the 10:30 a.m. EST storage report, April natural gas futures quickly fell to $7.100 on the storage number. However, the prompt month climbed higher just before noon, recording a morning high of $7.290.
Currently, natural gas stocks are 439 Bcf higher than the same time last year and 688 Bcf above the five-year average of 1,144 Bcf. According to the EIA’s historical data, which goes as far back as 1994, the 1,832 Bcf of working gas in storage as of March 10 is a record level. The closest comparison is 2002, when 1,728 Bcf remained in storage as of March 8, 2002. Spot futures for 2002 posted their low January 28 at $1.850 before staging an advance to $3.875 by May 14.
“The storage reports recently have been mostly insignificant because we are going to have an awful lot of gas in the ground going into the injection season,” said Tom Saal of Commercial Brokerage Corp. in Miami. “That hasn’t been a secret for a number of weeks. Unless the report’s number is far outside the range of expectations, I wouldn’t expect any real impact on the market.”
With some industry experts readily calling last week’s low of $6.450 a bottom to the downtrend, Saal said he is not yet ready to jump on board. “I haven’t seen enough indicators yet to tell me whether a bottom is in place,” he said. “However, the market is moving mostly horizontal.”
Saal, who utilizes the Market Profile analysis technique as one of his tools to formulate trading strategies, said the current horizontal direction could be key. Market Profile analysis describes not just where the market trades, but for how long it trades at each level. “Under Market Profile analysis, the more horizontal the market moves the better chance there is for a reversal,” Saal said.
Looking at today’s market, Saal said now is an “excellent opportunity” to use options if you’re hedging. “With the prices we have seen over the last year or so, current volatility around 45-50% is kind of on the low end of the range,” he said. “When the volatility gets low, then the premiums are relatively cheap. If the volatility is high, the premiums are expensive. Going with an options strategy would also be a little cheaper than buying outright futures because margin requirements are a lot higher with futures.”
Saal will be among a number of key industry leaders and energy experts looking at all aspects of natural gas supply, demand, prices and risk management strategies at GasMart 2006 in Denver, May 3-5. Featured speakers for the three-day event include FERC Chairman Joseph T. Kelliher, Questar Chairman Keith Rattie, Kinder Morgan’s Natural Gas Pipelines Group President Scott Parker, Houston Energy Partners Analyst John Olson, and hedge fund MotherRock COO John D’Agostino. Sponsors of the event are the IntercontinentalExchange (ICE), the New York Mercantile Exchange (Nymex), the Natural Gas Exchange (NGX), and North American Energy Credit and Clearing (NECC). For more information, visit https://gasmart.com.
The 55 Bcf withdrawal surprised very few people in the industry. A Reuters survey of 22 industry players had been looking for a 60 Bcf withdrawal for the week, while Wednesday afternoon’s ICAP-Nymex storage options auction had been calling for a 58.6 Bcf. The 55 Bcf withdrawal paled in comparison to last year’s 101 Bcf withdrawal and was significantly smaller than the five-year average pull of 79 Bcf.
The East region led the withdrawals for the week by removing 50 Bcf from underground stores, while the West region removed 10 Bcf and the Producing region actually injected 5 Bcf.
“Natural gas couldn’t go down, so it has to go up,” reasoned Tim Evans, an analyst with IFR Energy Services. “The 55 Bcf net withdrawal from DOE natural gas storage for last week may not have been bearish enough to make prices tumble, but it did fall short of the 79 Bcf five-year average as expected. The data has been erratic in recent weeks, but the figure for last week was somewhat higher than would have been implied by the heating degree day accumulations alone and suggests we could see a more supportive 65-75 Bcf withdrawal in the next round of figures. Overall though, it looks like the storage report wasn’t bearish enough to trigger a sell-off, a bullish performance almost by definition.”
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