That this is a banner year for US natural gas is no longer a dispute. But with just 12 trading days left to 2018, the market is moving from betting on the size of the double-digit gains for the year—now at around 40 percent—to whether the key $4 pricing for gas can be retained into January.
The shift in focus shows the sheer volatility that has beset the entire winter gas strip on the New York Mercantile Exchange, from the front-month January contract—one of the two remaining coldest months of any winter cycle—to April, the mid-spring period when the need for heating usually begins waning.
Scott Shelton of the ICAP (LON:NXGN) energy brokerage in Durham, North Carolina said the recent “shock and awe” selloffs in gas, including this week’s 9 percent price drop, might have run their course as mixed weather is replaced by more concerted cold.
Any Warmth In Coming Weeks Could Trip Up Gas Bulls
But he also suggested that the market’s ability to defend prices at above the $4 per million metric British thermal units level (mmBtu) was not a given, as any warmth in the coming weeks could severely trip up market bulls.
Dominick Chirichella, director of risk and trading at the New York Energy Management Institute, alluded as much when he pointed out that technical support for NYMEX’s January gas contract was well below $4, at $3.898 per mmBtu.
In a note issued Thursday, ICAP’s Shelton wrote:
“Roll pressure is apparent on the front end of the market as January/February and February/March are under pressure, while March/April continues to struggle under the concept that just ONE warm week in January may spell doom for it.”
Natural Gas Daily Chart
The bullish story in gas has weakened somewhat after a near unbroken rally from mid-September through late November.
Double Digit Drop In Gas Prices Since Last Week
It began with last week’s price decline of nearly 3 percent after two straight weeks of data showing underwhelming draws in gas from storage to meet heating demand.
The selling accelerated in the past three sessions, resulting in a cumulative 9 percent drop on the week, after the US Energy Information Administration (IEA) reported on Thursday a drawdown of 77 billion cubic feet (bcf) for the week ended December 7 versus analysts’ expectations for a decline of 84 bcf.
Dan Myers of Gelber & Associates, an energy markets advisory in Houston, Texas, noted that it was first EIA dataset of the winter season that fell short of the 5-year average for gas draws.
Myers wrote in commentary issued Thursday:
“The next withdrawal is expected to pick up significantly and reach triple-digits thanks to this week’s cold, but milder weather will hamper demand next week and put into question the strength of withdrawals in late-December.”
Inventories Unable To Clear Market’s High Bar For Weekly Withdrawals
That essentially has been natural gas’ problem this year: a high bar set by the market for storage withdrawals that inventories just haven’t been able to clear.
And that’s mainly because of one thing: record production.
The EIA expects US natural gas production to average an all-time high 83.3 bcf per day in 2018, and continue to rise next year to an average of 90 bcfd.
Logically, the voluminous flows of both primary gas, as well as that created as a by-product from shale oil drilling, should have storage facilities filled to the brim. Yet, that’s not been the case as consumption of gas by utilities has been also been on a tear this year.
Record Gas Output Offsets Two Pre-Winter Demand Cycles
The first wave of demand was seen during the summer when utilities had to burn higher-than-usual amounts of gas each week to meet spikes in power usage caused by extraordinary heat and resultant air-conditioning. The next wave came when an unexpected burst of cold during the fall season led to premature heating demand.
The back-to-back demand cycles have now left total gas in storage at nearly 230 bcf below the five-year average, ahead of the winter season which officially begins on December 21.
A ramp up in liquefied natural gas export capacity has also boosted the demand equation for natural gas this year. From just around 3 bcf per day a year ago, US LNG export capacity has reached almost 5 bcfd now. The EIA expects this to continue rising to nearly 9 bcfd by the end of next year, making the United States the nation with the third largest LNG export capacity after Qatar and Australia.
Yet, the trade remains fixated with the weekly storage draw numbers issued by the EIA, with prices falling at a whim if demand underwhelms in any dataset issued by the agency.
Chirichella of the Energy Management Institute said above normal temperatures were projected to engulf most of the main natural gas consuming regions in the US over the next eight to 14 days. He added:
“The forecast should see heating related demand well below normal for this time of the year. Short-term weather forecasts are still playing out as the main price directional driver.”