February natural gas trekked below $3 again in active trading Thursday as traders factored in government storage data that showed a continued widening in the storage surplus. At the close February had given up 11.6 cents to$2.980 and March had retreated 11.0 cents to$3.017. February crude oil slipped $1.41 to $101.81/bbl.

Trader’s antennae were on high alert for the 10:30 a.m. EST release of storage figures by the Energy Information Administration (EIA). The EIA reported a weather-driven withdrawal for the week ended Dec. 30 of just 76 Bcf, somewhat lower than what the market was expecting. “The decline was less than expected and also bearish relative to the 106 Bcf five-year average for the period. The surprise may have been due to a larger-than-expected impact from the holidays, but also suggests a weakening of the supply/demand balance, a second consecutive bearish miss,” said Tim Evans, analyst with Citi Futures Perspective in New York.

Not only was it a bearish miss, but the resulting settlement of the February contract below $3 is seen by some as indicative that prices are headed considerably lower. Thursday’s settlement of February at $2.980 has analysts suggesting “this market should be headed lower not only from a technical standpoint but also a fundamental standpoint,” said Steve Blair, an analyst at Rafferty Technical Research in New York.

“Today’s withdrawal of 76 Bcf is being compared to last year’s 135 Bcf pull, and I’m a little surprised the market didn’t break $3 right then and there. If you compare the second week of January last year going forward for the next six weeks, the average draw was over 196 Bcf. Unless something dramatically changes weather-wise, this storage differential is going to widen, and widen and widen.

“We are now 458 Bcf greater than the year-on-five-year differential, and if we keep getting 80 Bcf draws a week compared to 196 Bcf, that’s just going to widen the surplus further.”

From a technical perspective Blair said the next zone of support was at $2.65; “that’s where the 20-year trend line is and it’s very possible the market is poising itself for a downside test.” He said a sale at current levels and covering when prices fall to the trend line was a very viable trade. “I would not only do that but reverse to a long position when prices hit $2.65. There’s a very small risk, for that trend line has held a number of times over the last 20 years.”

Estimates for the EIA report were well below seasonal norms. Last year 135 Bcf was withdrawn from storage and the five-year average stands at 106 Bcf. A Reuters poll of 18 traders and analysts showed an average 82 Bcf with a range of 67-98 Bcf. IAF Advisors of Houston was looking for a pull of 68 Bcf, and Bentek Energy forecast a decline of 72 Bcf.

Supply and demand continue to be out of balance. “The natural gas market remains burdened by excess supply growth that has weakened the supply-demand balance to the point that extreme weather is needed to produce supportive storage comparisons, and in the absence of extreme weather we’ve now seen 16 consecutive weeks of either above-average storage injections or below-average storage withdrawals,” said Evans.

“Based on recent storage flows and the population-weighted degree day accumulations projected for the weeks ahead, our model forecast storage withdrawals of 93 Bcf for the week ended Jan. 6.

“With storage as forecast, the storage surplus would expand to 535 Bcf as of Jan. 20, with no particular hint that Jan. 20 would mark the end of the bearish trend. As we’ve also been noting, since the coldest days of the year typically occur in late January, we’re also nearing the time when the market can begin to rely on a seasonal warming trend that will make significant progress in reducing the storage surplus unlikely,” Evans said in a note to clients.

As of Dec. 30, working gas in storage stood at 3,472 Bcf, according to EIA estimates. Stocks are now 356 Bcf higher than last year at this time and 458 Bcf above the five-year average of 3,014 Bcf.

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