Coming in about 15 Bcf over the industry consensus projection and well above historical figures, the Energy Information Administration (EIA) reported that 230 Bcf — heavily weighted to the East Region — was removed from underground storage for the week ended Jan. 21.

However, even though the withdrawal was larger than expected, the expiring February natural gas futures contract apparently had already factored such a pull into the market. Immediately following the release, the prompt month got as high as $6.55 before selling back off to $6.41 eight minutes later. February expired 10 cents lower on the day at $6.288, while March settled at $6.352, down 6.9 cents from Wednesday.

“The storage withdrawal number was right inline with the ICAP auction number, so I would surmise that the number was already in the market,” said Ed Kennedy of Commercial Brokerage Corp in Miami. While the industry consensus was for a 215 Bcf pull, the ICAP storage options auction was set at an implied market forecast of a 229 Bcf withdrawal (see Daily GPI, Jan. 27).

“The storage report has nothing to do with expiration,” Kennedy added. “The thing that really decides expiration is who wants to make or take delivery. That is decided by nothing other than the price. With these numbers, you would think more people would want to make delivery than take.”

Noting that the expiration was pretty orderly, Kennedy said the trading charts look very healthy. “I told people on Wednesday that I was looking for a close on Thursday higher than $6.12 and below $6.50. Thursday’s settle fell right in the middle. We’ve had very good support both on February and March at the $6.10 level. Likewise, the last three times we got above $6.50 a trade came in and slam-dunked it.

“While we’ve go cold weather coming for Chicago through Boston, the east, west and south are going to be what I like to call ‘Chamber of Commerce weather’ — what everybody wants for their tourists,” he said. “We’ve got plenty of gas to handle the Great Lakes, New York and New England. I think you would need the threat of an ice age to really turn this thing around in the near term and the last time I checked the Wooly Mammoth was grazing away not looking very worried.”

Kennedy said he believes there is still more impetus to the downside here. “I don’t think your going to get much below $6 the first time down because people will begin to do their summer hedging, but the path of least resistance is going to be down, unless of course you see that Wooly Mammoth starting to look concerned.”

The 230 Bcf withdrawal blew away last year’s withdrawal of 184 Bcf and the five-year average decline of 165 Bcf. Working gas in storage now stands at 2,270 Bcf, according to EIA estimates. The sizeable pull last week also cut down surpluses to the year-ago and five-year average figures. From the prior week, stocks went from being 197 Bcf higher than last year to 151 Bcf higher. Likewise, stocks went from being 344 Bcf higher than the 1,991 Bcf five-year average to 279 Bcf higher with this report.

With the winter storms and temperatures in the East last week, it was no surprise that the region led the withdrawal charge. The East pulled 148 Bcf from underground storage, while the Producing and West regions withdrew 63 Bcf and 19 Bcf, respectively.

Analysts will be incorporating Thursday’s storage figure into an assessment of what the elevated inventory levels might mean for late winter and early spring prices. “In years where there has been an above average level of gas in inventory at the end of the storage season, the market stays relatively depressed until late February and then it tends to rally,” says Bill O’Grady, vice president AG Edwards, St. Louis. He pointed out that the year closest to present circumstances was 2002, yet the market response at least at present is not as close to that year as you might expect.

In 2002 natural gas declined to 85% of the value on the previous December 1. This season using the September 2005 futures as an example the September futures traded at $6.618 on December 1 and are currently at $6.472 or 97.8%. “That’s a little high,” says O’Grady who looks for the contract to drop between now and the early spring.

Since the September futures are trading at 97.8% of it’s Dec. 1 level, O’Grady “would not be shocked to see further price weakness, but that weakness probably ends by the third week in February,” he said. He pointed out that if the market were to replicate its’ 2002 performance, then 85% of $6.618 would pull the September futures down to $5.62. “Once you get past that 85% level, the odds of going still lower are slim,” he said.

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