The earliest triple-digit natural gas drawdown for November just occurred, leaving gas in storage for winter heating at multiyear lows. But gas prices are as volatile as ever, instead of rising to the $5 levels that many gas bulls had been counting on.
And market swings look likely to continue for the foreseeable future.
“Storage is still a concern, but the way the market has swung from cool indifference to low storage levels for much of the year to the other extreme in which winter supply disruptions feel inevitable suggests that something will have to yield,” Dan Myers of Gelber & Associates wrote after Wednesday’s market, when prices fell on the huge drawdown reported by the Energy Information Administration.
Drawdown Trounced Estimates
The first cold season gas draw of 2018/19 resulted in a pull of 134 billion cubic feet (bcf) from storage, the EIA said.
Analysts had been expecting a deficit of just around 109 bcf, according to a Reuters poll of analysts. That lower number itself would have already accounted for the earliest triple-digit storage decrease for November, according to federal energy data going back to 1994. On paper, the additional 25 bcf raised the stakes immensely for gas pricing.
But the front-month December gas contract on the New York Mercantile Exchange failed to hit the level of $5 per million metric British thermal units (mmBtu) gas bulls were predicting after the EIA data. Wednesday’s session high was just $4.86 per mmBtu. That was lower than the $4.93 level hit some two weeks ago.
Natural Gas Futures
Thanksgiving Cold A Major Psychological Boost
More surprising, pricing for December gas fell from Tuesday through Wednesday after the release of the storage data. It only bounced back in Friday’s session after factoring in the bitter cold on Thursday, when temperatures fell to the low 20s Fahrenheit, making it one of the chilliest Thanksgivings ever for the Northeast, the bastion of gas-driven heating. Northeast temperatures remained around 25F Friday but gas prices hovered at $4.50 per mmBtu, some way from the $5 target.
“A milder couple of days for much of the country this weekend will allow things to thaw out before more below-average temperatures return before the end of November,” Myers wrote in his commentary.
But Scott Shelton, energy broker at ICAP) in Durham, N.C., said the market was barely reflecting the positive fundamentals of the cold weather, citing the possibility that algorithmic trading models are behind the volatility.
“I really think that the market has run out of shorts here and the systematic algos are smelling it and trying to generate some pain for the longs on a day when not everyone has decided to come into the office,” Shelton said in a note.
Natural Gas Remains The Outlaw
Natural gas has also been one of the most-difficult-to-read commodity markets this year due to supply-demand peculiarities.
Large volumes of gas, sourced from primary drilling and also obtained in secondary form during drilling for shale crude, have led to record production of the fuel, not unlike the situation in crude oil. Despite such overwhelming output, storage levels of gas never reached the danger of overfilling, thanks to a hot summer and, now, an early cold that kept air conditioners and heaters in overdrive.
But unlike crude oil prices, which hit four-year highs before being beset by the most prolonged selloff in history, natural gas looks poised to finish as 2018’s best commodity with a year-to-date gain of 55%. Traders also said some of gas’ latest gains have come at the expense of oil, as hedge funds shorted crude while going long gas.
Even so, daily price swings of up to 19% have restored the Wild West reputation of natural gas.
“I think the inmates are still running the asylum here still and the weekend risk is even more immense than it once was as this week’s draw (would have been) larger than expected” during the Thanksgiving week cold, Shelton said.