Large Storage Withdrawal Does Little to Rattle Natural Gas Futures
Coming in on the high side of expectations, the 104 Bcf net withdrawal from storage reported by the Energy Information Administration (EIA) Thursday morning for the week ended March 24 triggered only a minor blip in natural gas futures. The May contract -- in its first regular session as prompt month -- finished the day 3.1 cents higher at $7.487.
The stout withdrawal, which reflected last week's cold temperatures, outpaced most industry expectations as well as historical analogs. The 104 Bcf pull was well above the Reuters survey's 84 Bcf withdrawal projection as well as the ICAP-Nymex storage options auction's final result of a 96.9 Bcf withdrawal. According to the EIA, the withdrawal far surpassed last year's 56 Bcf pull and the five-year average withdrawal of 30 Bcf.
Immediately following the report, May natural gas futures jumped 16 cents to trade at $7.550. However, following that initial knee-jerk reaction, the newly minted prompt month was unable to get any higher on the day. The contract was able to record a low of $7.370 in the afternoon before moving higher to settle.
With one week left in the traditional withdrawal season, the level of working gas in storage (1,705 Bcf) is on pace to end March at the second highest inventory level since futures began trading, surpassing the stout ending surpluses of March 1992, 1,545 Bcf and March 2002, 1,518 Bcf. Only March 1991 would be higher at 1,912 Bcf.
"We have a lot of gas in storage, and May natural gas contract prices are trading comfortably around $7.50," said Tom Saal, managing director and commodity trading advisor with Commercial Brokerage Corp. in Miami. "The price action tells me that the market might think current gas storage levels are not enough."
Saal noted that the market over the last couple of years has really been concerned about potential supply problems. "It is almost as simple as Ivan, Katrina and Rita," he said, referring to the Atlantic hurricanes of the last two years. "Those storms are the market's most recent memories. Those three words alone, I think, have allowed some premium to be pumped into this price...and people are willing to pay it.
"So while the level of natural gas storage may be high by historical standards, the market is saying that the amount of gas in storage may not be enough if we get another direct hit in the Gulf of Mexico."
As hedging strategy, Saal said he recommends buying options. "Because we have been going sideways for a month or so, the volatility has fallen dramatically. Low volatility means low premiums for options," he said.
Despite the significant storage surplus, history shows that prices may be able to marshal a hefty advance once the market fully digests the prospect of a large season-ending inventory. Spot futures for 2002 posted their low on Jan. 28, 2002 at $1.850 before staging an advance to $3.875 by May 14, 2002.
At 1,705 Bcf, stocks are 459 Bcf higher than last year at this time and 651 Bcf above the five-year average of 1,054 Bcf. Due to a cold spell in the East last week, the East region led the withdrawal charge by removing 73 Bcf from underground stores. The Producing and West regions withdrew 21 Bcf and 10 Bcf, respectively.
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).
This 20th annual gathering of natural gas market participants, hosted by Natural Gas Intelligence, features more than 20 speakers, a sold-out Exhibit Hall, a golf tourney, Rockies baseball game and an anniversary celebration reception. For more information, visit http://gasmart.com.
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