Like all good things that must come to an end, the curtains may finally be closing on the pre-winter party for natural gas bulls.
But how quickly will they clear the room?
Natural gas production was at a record high all summer. But hot weather until the penultimate week of September caused a spike in air-conditioning that forced utilities companies to burn more gas to feed the surge in power demand rather than store the fuel in underground caverns for winter heating.
High Inventory Rise May Halt Recent Whopping Gains
As a result, preliminary gas reserves for the 2018/19 winter have been at one of their lowest for the cold season and gas prices on the New York Mercantile Exchange (NYMEX) rose almost nonstop the past three weeks, handing a whopping 15 percent gain to correctly-positioned hedge funds and other speculators.
But Thursday’s weekly data for gas reserves showed an abrupt end to that trend as utilities injected a surprisingly high volume of the fuel into storage. Now, traders holding large long positions in gas are expected to exit them, if they haven’t already begun dumping those contracts.
Natural Gas 5-Hour Chart
NYMEX’s front-month gas contract for November fell 2 percent to $3.165 per million metric British thermal units on Thursday as the market digested last week’s stock injection of 98 billion cubic feet (bcf) announced by the US Energy Information Administration. It was the highest inventory rise since May and double the previous week’s injection of 46 bcf. Traders had expected an 88-bcf build at most for last week.
Is $3 Gas Worth Defending?
Gas prices at above $3 have made headlines this summer, with many arguing they were an anomaly, given the record high production in the fuel. Some defended the highs, citing weekly storage injections that have persistently fallen below the five-year average—a key determinant for ensuring adequate winter supplies.
With milder fall weather expected immediately across most of the United States, gas bulls would have to decide whether the $3 level was worth defending.
Daniel Myers, natural gas analyst at Gelber & Associates in Houston, believes it’s a question of when, not if, the support will be broken. Myers wrote in a commentary on Thursday:
“The front month dared to trade above $3.25 yesterday, levels it hasn’t reached since the heart of last winter, but is coming down to earth as it retreats to $3.18 today.”
He said last week’s 96-bcf injection was “a positive step in reassuring the market” that low inventory builds were an exception at this time of the year rather than the norm. He wrote:
“Although the deficit to five-year average levels remains at 607 bcf, it can be expected to shrink more in the coming weeks. Prices will likely continue moderating as they digest this information going into the weekend.”
Dominick Chirichella, director of risk management and trading at the Energy Management Institute in New York, agrees the weather forecast in general was less supportive to natural gas over the next eight to 14 days.
But he’s also wary that temperatures could drop rapidly in the next few weeks and hasten the need for intense heating. That could put a squeeze on supplies and push the market toward the high $3 levels again.
Output Vs Stocks Remain A Worry
Chirichella points out that at 2,866 bcf, current reserves of gas were 17 percent below the five-year average of 3,473 bcf. Production for 2018 was expected to reach a record high of 81.34 bcf a day from 73.57 bcf per day in 2017. He said:
“Market participants are still highly concerned over the large inventory deficit and less convinced that growing US production will be enough to offset any possible major bouts of cold temperatures that are becoming more likely to hit during the heart of the winter season.”
The current speculative and fund positioning in NYMEX gas also suggests more room for gas bulls to buy, compounding their dilemma.
“The last reading showed a net short of 7,148 contracts and that should leave the market minimally overbought on a bigger picture perspective,” ADM Investor Services wrote in a commentary. Modern history, it said, suggests “the market should not be considered excessively overbought until the net long is above 40,000 contracts.”
That could give gas bulls pause to clear the room.