Natural Gas Bulls Pray For Sheer Cold As Storage Loses Charm

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Natural gas bulls’ favorite statistic for the winter—low storage—is fast disappearing.

The U.S. Energy Information Administration’s weekly supply-demand update showed on Thursday that gas in underground caverns was 33 billion cubic feet above year-ago levels, while it maintained a deficit of just around 305 bcf to the five-year average.

The 2018/19 cold season that began on September 23 with the start of fall saw some of the lowest pre-winter gas reserves. Early storage readings showed a deficit of more than 600 bcf to the five-year average.

Despite utilities adding more gas to storage over the past four months than burning it, last week’s utilization of 163 bcf still exceeded analysts’ 145 bcf forecast for heating demand.

Coming Week Of Cold Will Be One To Watch

And those long on NYMEX’s Henry Hub futures for February and March could be fortifying their positions next week as the Midwest and Eastern regions brace for another icy blast that could deliver more of the kind of intense heating demand seen from the latest cold snap between Sunday and Tuesday.

Dan Myers, who studies gas supply-demand for Houston-based consultancy Gelber & Associates, said late winter surges could result in larger-than-expected drawdowns from storage through January, keeping key Henry Hub futures above $3 pricing despite less-than-stellar fundamentals. Added Myers:

“Next week will be the one to watch as extreme cold invades and drives heating demand substantially higher going into February.”

“The market has discounted this risk by deflating the winter premium earlier this week, but it will be difficult to ignore if inventories begin to drain faster than average and there is still more cold left in store.”

Dominick Chirichella, director of risk and trading at the DTN-owned Energy Management Institute in New York, agreed, saying the call on gas-fired heating will be above normal in the coming week, as 80 percent of eastern U.S. was expected to experience below-normal temperatures.

Volatility Could Be Part Of Mix Too

Natural Gas Bulls Pray For Sheer Cold As Storage Loses Charm

Natural Gas 300-Min Chart

But beyond next week, Chirichella cautions of a potential return of volatility—the kind that led gas prices to swing up to 20 percent in a day in the past two months—if the weather goes back to blowing hot and cold. Said Chirichella:

“The eight to fourteen-day forecast, for instance, is less supportive than the shorter term forecast. That signals a return to normal heating demand.”

“But with more than half of the winter heating season in the history books, it is going to have to remain cold for a sustained period for prices to enter a strong upside price rally.”

In Thursday’s trade, Henry Hub’s front-month February contract settled up 4 percent at $3.099 per million metric British thermal units, after a stunning collapse of 15 percent over four previous sessions that left the spot contract at a two-week low of $2.98 on Tuesday. Nearby March gas, meanwhile, remained just under $3 per mmBtu.

Scott Shelton, energy futures broker and commentator at ICAP in Durham, North Carolina, said March Henry Hub was probably trading at “fair value”, but felt the February contract was at a discount given the continued potential for inclement weather next month.

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