Capping off a wild day that included a natural gas storage report and the expiration of March options, March natural gas retested the sub-$7 mark on Thursday only to find that support still resides in the area. Late in the session, the prompt month punched higher on a run of buying, putting in a high of $7.600 before settling at $7.458, up 17.5 cents from Wednesday’s close.
The Energy Information Administration (EIA) reported Thursday morning that 123 Bcf was removed from underground stores for the week ended Feb. 17. The withdrawal was significantly larger than last year’s 89 Bcf pull but matched closely with industry expectations and the five-year average withdrawal of 126 Bcf.
Working gas in underground storage now stands at 2,143 Bcf, a record high for this time of year. The closest comparison is the 2002 season, when 2,036 Bcf was in storage on Feb. 15, 2002. With record levels of natural gas in storage, the relatively large withdrawal reported on Thursday had minimal effect on the gas market, which had its attention elsewhere. March options went off the board Thursday and March futures expire Friday.
After showing almost no reaction to the storage report’s release, March natural gas began slumping in the early afternoon, culminating in a couple $6.990 ticks surrounding 1 p.m. However, the $7 area proved supporting once again, vaulting prices higher from there. During the last five minutes of trading, a late buying push vaulted futures 45 cents higher to put in the $7.600 high before easing slightly to settle.
Commenting on the late bounce, a Washington, DC broker said apparently someone was doing a “huge roll” late. “There was some large trade going on at the end…and that ran things up,” he said. “However, I would expect trading on Friday to act a lot like it did on Wednesday, following the 50-cent up day on Tuesday. We came in on Tuesday and it jumped up, and then on Wednesday it was beaten back down.”
The broker noted that the EIA storage report really was of no consequence. “We are too late into the withdrawal season. The math just does not add up,” he said. “Even above average withdrawals aren’t going to do anything to this market. It is almost as if the shoulder season began early. The only question now is what kind of summer we are looking at. In addition to the weather cycle, this includes what the impact of reserve replacements and Gulf of Mexico production are going to be. I think this is the question that the market is getting ready to wrestle with next.”
Looking at the market’s current direction, the broker said there still appears to be a bearish tint to the market but anything can happen on expiration day. “There is some indication that there are still shorts who want to cover and get out, so there might be some run-up at that point if those guys can’t find alternative means to get out of their futures contracts, namely converting their Henry Hub outright futures into the Nymex Clearport quarter-size cash settle contract.
“We do a lot of that business where our clients who are long futures — end users, utilities and marketers — can trade out of their position by finding a counterparty to do a Clearport trade in sort of a two-step dance,” he explained. “We do a EFS exchange of futures for a swap and then we buy the Clearport contract. Indications are there are some people — who need to be buyers — that are willing to pay premiums to do their buying to cover their short positions. This is why it would not surprise me to see a little pop higher at some point during Friday’s trade.”
If prompt-month futures were to break below the psychological support at $7.00, the broker said the mid-$6.00 level could be next. Looking pretty far back on the chart, he said the $6.30 to $6.60 zone looks like pretty strong support from the early part of 2004. “If we were to get below the $6.90 to $7.00 support zone, we could see $6.50, but at that point we are looking more than 18 months back in time,” he said.
Commenting on the price swings on Tuesday and Wednesday, IFR Energy Services analyst Tim Evans said it was classic “pump and dump” action. “Over the past two sessions, natural gas futures have arced through a 5% rally through accumulated buy stops followed by a 5% drop when those gains proved unsustainable in a classic edition of a market pump and dump, designed to simply exploit pure vulnerability to price movement, first on one side of the ring and then the other,” Evans said.
“The fundamental tension behind these swings remains the same as they have been in recent weeks, with a temperature outlook promising stronger heating demand going forward and a massive storage surplus that is more consistent with far lower price levels,” he said. “With little time left to the heating season anyway, any shift toward milder temperatures could trigger a further avalanche of selling in our view.”
The storage report Thursday was slightly lower than most expectations. According to a Reuters survey of 18 industry players, an average of 120 Bcf was expected to be withdrawn. However, Golden, CO-based Bentek Energy was projecting a storage withdrawal of 134 Bcf. In addition, Wednesday afternoon’s ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, zeroed in on a 130 Bcf withdrawal for the week.
As of Feb. 17, working gas in storage stood at 2,143 Bcf, according to EIA estimates. Stocks were 410 Bcf higher than the same time last year and 694 Bcf above the five-year average of 1,449 Bcf. Coming off a cold week, the East region pulled 75 Bcf, while the Producing and West regions removed 33 Bcf and 15 Bcf, respectively.
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