Dangerously cold temperatures are upon U.S. natural gas territory, yet prices of the fuel are hovering at late summer lows, exhibiting a bizarre phenomenon whereby the market is looking beyond immediate chill to forthcoming warmer winds.
Natural Gas Daily Chart
The February contract, the last of the two winter month plays for gas on the New York Mercantile Exchange’s Henry Hub, remained below the key $3 level as it expired as the market’s benchmark on Tuesday, settling at a mid-September low of $2.95 per million metric British thermal units.
In fact, almost all of the 2019 Henry Hub gas strip, from new benchmark-designate March through November, settled the previous session under $3 per mmBtu.
Anemic Market Action Despite Temperatures At 20-Year Lows
The February contract itself gained a paltry 1.3 percent on Tuesday despite Central and Eastern United States—which are known to use natural gas more than any other fuels for heating—hunkered down for two days of temperatures at 20-year lows from extreme arctic winds.
Meteorologists at weather.com say that by Wednesday and Thursday, morning lows may reach the minus 20s to perhaps minus 30s Fahrenheit (minus 29 to minus 34 Celcius) in the Twin Cities, with minus teens and minus 20s in Des Moines, Iowa, Chicago and Milwaukee.
Subzero-cold lows may extend through much of the Ohio Valley and should arrive into the interior Northeast by Thursday. Thursday will be the coldest day along the Northeast Interstate 95 corridor, with lows in the single digits from Baltimore to Boston.
Yet, by Friday, Henry Hub’s March gas could be under pressure again, said Dan Myers, analyst at Gelber & Associates in Houston, who projects the change from relatively warmer weather expected by the weekend. Said Myers:
“Current forecasts show above-normal temperatures returning to population centers in the East by the mid-range and cutting into demand expectations going into February heating.”
Scott Shelton, energy futures broker and commentator for ICAP (LON:NXGN) in Durham, North Carolina, agreed, saying:
“Even a cold second half of February would only support the cash market for gas and not futures because a warm first week would already have done damage done to February HDDs.”
HDDs measure the number of degrees a day’s average temperature is below 65 degrees Fahrenheit (18 degrees Celsius). They are used to estimate demand for heating homes and businesses.
Record Production Also Weighing On Market
Dominick Chirichella, director for risk and trading at DTN-owned Energy Management Institute in New York, pointed to another phenomenon that’s weighing on the market: record-high production. Said Chirichella:
“The latest short-term temperature forecast issued today is less supportive to yesterday’s projection as the cold temperature area is confined to the west U.S. and is less intense. Above normal temperatures are expected over about 50 percent of the U.S. after this cold stretch. The call on Nat Gas for heating-related demand will be below normal for this time of the year during this forecast period.”
He added that warmer forecasts for next week “could force inventory withdrawals to quickly return to underperforming.”
Deficit In Winter Inventories Nearly Halved By Inconsistent Cold
The 2018/19 cold season that began on September 23 with the start of fall had one of the lowest pre-winter gas inventories, with early storage readings showing a deficit of more than 600 billion cubic feet to the five-year average.
Since then, record production of gas and weekly data showing underwhelming drawdowns from storage for heating have narrowed the deficit to just over 300 bcf. Last week’s gas consumption was, however, expected to have been higher, with data due on Thursday expected to show a drawdown of 187 bcf vs the year-ago level of 126 bcf and the five-year average of 150 bcf.
Nevertheless, Chirichella said he was adjusting his market view and bias to neutral, as gas prices were below his comfort level for technical support.
Henry Hub’s March gas settled at $2.903 per mmBtu on Tuesday. Chirichella pegs support for the contract at $2.772 and resistance at $3.102.
Potential For Volatility Still There
Still, recent snapbacks resulting in price swings of nearly 20 percent at times suggest that gas bulls may still have power to surprise, especially during intense cold periods when market psychology is on their side.
Notwithstanding Tuesday’s modest market gain, Gelber & Associates’ Myers said gas demand had probably surged as frigid temperatures invaded a large swath of the U.S. and will continue climbing through late Thursday. He added:
“Given how quickly weather models flipped over the past weekend to below-normal temperatures in the West and Central, there is likely still time for a price correction that includes the return of Eastern cold in the next month.”