Natural gas traders do have a perverse sense of humor after all. Less than 24 hours after the Department of Energy revised downward its forecast for the average annual wellhead price this year to below $5.00, the futures market rocketed back above the $5.00 mark Thursday amid technical bullishness and following a slightly smaller-than-expected storage report (74 Bcf injection).

Short-covering by fund traders mixed with fresh long accumulation by commercial buyers as everybody wanted a piece of the action. The September contract was the focal point of the buying frenzy and was lifted 30 cents higher in just 40 minutes following the storage release. It finished the session at $5.082, up 33.7 cents on the day.

According to the Energy Information Administration, underground storage increased 74 Bcf to 2,102 Bcf during the week ending Aug. 1. Though the refill was bearish in absolute terms as it easily surpassed the year-ago and five-year average builds of 33 and 51 Bcf respectively, it was perceived as bullish because it fell short of the 75-85 Bcf range of expectations. At 2,102 Bcf, storage is now 461 Bcf less than last year and 234 Bcf below the five-year average.

With 13 weeks and roughly 900 Bcf left to reach the 3,000 Bcf mark by Nov. 1, the market needs to inject 69 Bcf/week from now through the end of the injection season. Although weekly refills have averaged a whopping 93 Bcf thus far this injection season, the market will find it increasingly difficult to keep up that pace. In 2001 when storage was at similarly low levels at this time of year, the market managed to build only 66 Bcf/week from August through October. By comparison, last year at this time when storage was much fuller, the last 12 injections of the season averaged just 50 Bcf.

But while fundamental traders were quick to point to the smaller-than-expected 74 Bcf add, technical traders confidently suggested there were other factors at work Thursday morning. “We held support last week at $4.58 and steadily firmed up this week, giving the charts time to repair,” said George Leide of New York-based Rafferty Technical Research. “The storage number was just what this market needed to rally. [Floor] traders were expecting a number closer to 80 Bcf.”

Even dyed in the wool fundamental traders were pointing to technicals in an attempt to explain Thursday’s price action. “The EIA report was below expectations and was clearly not a bearish as recent reports. However, we do not consider this report bullish and simply felt the market was set up for a short-covering rally,” wrote Kyle Cooper of Citgroup in a note to clients Thursday evening.

“The rally off last week’s high has been a marvel of technical short-covering, inspired by the barest fig leaf of fundamental support,” chipped in Tim Evans of New York-based IFR Pegasus. For Evans, the 74 Bcf injection was bullish only in that the market has come to expect even larger (bearish) injections.

Now that September futures have broken above its first level of resistance in the $5.02-04 area, Leide looks for a move up $5.18-20. Should prices sift lower, however, he would look to short the market below the $5.02 level for trade. In the long run, Leide remains bullish as long as the September contract remains above $4.835. A break of that level would likely lead to a move down to the $4.76-80 gap notched on the daily chart by Thursday’s open.

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