This Cold Isn’t Cutting It For Natural Gas Bulls

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It will get colder again in February, but not where natural gas bulls would like it.

To add to the pain of those still holding long winter positions on the Henry Hub, the U.S. Energy Information Administration is expected to report on Thursday that utilities drew 60 percent less gas for last week than they used for heating a year ago.

This Cold Isn’t Cutting It For Natural Gas Bulls

Natural Gas Daily Chart

The front-month in U.S. gas futures, March, fell almost 4 percent on Wednesday, wiping out nearly all of the week-to-date gains, in anticipation of tepid heating demand for last week and less-than-positive forecasts that show a cold concentration in the West rather than the more price-sensitive Northeast.

Dan Myers, gas analyst at Gelber & Associates in Houston, said:

“Forecasts are pulling back the center of cold further to the West and leaving above-normal temperatures along the East Coast by the 10-15-day period, partly reversing the more bullish forecast changes from the start of the week.”

Dominick Chirichella at the DTN-owned Energy Management Institute in New York concurred, saying normal and above-normal temperatures were expected in most of the central and eastern U.S. over the next couple of days, before colder-than-normal weather makes a comeback.

Coming Cold May Be Too Little, Too Late

Added Chirichella:

“The short-term weather pattern is projected to evolve back to a winter-like weather in key parts of the U.S., but it may be too little too late.”

A Reuters poll of 21 analysts projected that U.S. utilities pulled 85 billion cubic feet from storage for the week ended Feb. 8, opposed to the 237-bcf withdrawal in the previous week to Feb. 1 when a polar vortex resulted in record cold temperatures in several parts of the country. The year-ago drawdown for last week was 185 bcf while the five-year average was 160 bcf.

Last week’s drawdown suffered as there were only 158 heating degree days, compared with 205 HDDs in the same week a year ago and a 30-year norm of 190 HDDs for the period. HDDs measure the number of degrees a day’s average temperature is below 65 Fahrenheit (18 Celsius) and is used to estimate demand to heat homes and businesses.

If the 85-bcf draw for last week is confirmed by the EIA in its report due at 10:30 AM ET (14:30 GMT), gas remaining in storage would amount to 1.875 trillion cubic feet, the lowest since 2014 for a Feb. 8 week.

Below $3 Pricing Seems Norm

Two months ago, such a storage deficit might have sent Henry Hub’s front-month gas contract soaring to $3 per million metric British thermal units or above. Not these days, when record production of gas enables underground salt caverns to quickly make up what they lose from sporadic bursts of cold. At Wednesday’s settlement, March gas stood at $2.575 per mmBtu, down 12 percent on the year.

The EIA itself expects lower gas prices to continue through 2019 and into 2020 as production grows and storage inventories return to more normal levels. In its Short-Term Energy Outlook for February released Tuesday, the agency forecast a $2.83 average for Henry Hub’s spot price through this year, compared to last year’s $3.15 average.

Although the EIA has moderated its forecasts for production growth since last month, it still sees dry gas output averaging slightly over 90 bcf per day this year, and the growth to be enough to refill storage to five-year average levels in the upcoming injection season.

But Myers of Gelber & Associates thinks gas prices could surprise to the upside again in summer 2020.

The EIA’s conservative estimate for gas demand, Myers said, could “minimize risks that stronger-than-expected demand will keep storage at a disadvantage through the spring and summer like last year”.

Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, also believed there could be active buying of gas soon for summer 2020, although he believes prices would drop to the lower $2.50 level before that, and positions taken would be more of bearish spreads.

Shelton added:

“I want to be bullish on this dip as winter isn’t over and end-March will be on the low side. But the market has a lot more to sell before it’s time.”

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