Natural Gas: Warm Weather, Market Dynamics Create Havoc for Bulls
Barani Krishnan | Nov 10, 2022 20:29
- If weather models confirm warming, gas prices could remain under $6 per mmBtu
- If Arctic cold breaks out, then Henry Hub could retest last week’s $7.20 highs
- Gas storage hanging close to the five-year average and year-over-year levels
Gas bulls: Forget Europe’s energy squeeze. Forget LNG. Think just one thing: Weather.
Even with no changes in the major weather forecast models, including the Global Forecast System (GFS) and the European (ECMWF) models, temperatures across the US central and eastern regions are beginning to imply there could be a moderation of temperatures during the last week of November. This is being construed as a bearish catalyst.
Looking ahead, if there are any signs in the major weather models that a significantly more intense outbreak of Arctic cold will materialize in late November and December, then it’s not out of the question that front-month natural gas futures on NYMEX’s Henry Hub will retest the $7.20 per million British thermal units (mmBtu) level or higher.
Source: Gelber & Associates
Conversely, if the weather forecast models confirm with great certainty that a warming trend will unfold in late November and early December, it would be hard-pressed for buyers to gain much traction, and prices could remain under $6 per mmBtu for the time being.
Alan Lammey, analyst at Houston-based gas markets consultancy Gelber & Associates, said in an email to the firm’s clients on Wednesday that was shared with Investing.com.
“As our analysis of NYMEX gas futures recently noted, the gas futures market is likely to be hyper-sensitive for quite some time. We foresee the potential for frequent, exaggerated price volatility over the winter months.”
Sunil Kumar Dixit, chief technical strategist at SKCharting.com, said a sustained break below $5.65 in NYMEX gas could push the market toward $5.27 and, eventually, $5.04. Adding:
“My mid-term outlook is bearish, targeting $4.37 and $3.77.”
The chartist has a caveat, though, for the market’s downside: Prices should stay at or below $5.65. He added:
“Otherwise, a short-term rebound towards $6.61 is a high probability.”
It was the same song but a different day in NYMEX front-month natural gas futures on Tuesday as elevated price volatility remained a dominant fixture in the market.
After a couple of strong closings on Friday and Monday, a major price reversal ensued on the Henry Hub over the past two sessions. At the end of the Nov. 8 session, NYMEX’s front month—the December 2022 gas futures contract—tumbled a whopping 80.6 cents, or 12%, to close at $6.138 per mmBtu.
Wednesday’s extended liquidation on NYMEX front-month gas futures had some fundamental influences behind the move. But the bigger picture remained market dynamics.
Adds Lammey:
“While there will be many legitimately bullish catalysts and situations that will unfold in the gas futures market in the weeks and months ahead to send prices flying as the winter comes into play, for now, $7.00-plus/MMBtu natural gas futures are not exactly justified.”
The analyst has his reasoning.
Presently, natural gas storage inventories are hanging close to the five-year average and year-over-year levels. At the same time, Hurricane Nicole is poised to not only bring potential power outages to Florida, but the storm could run the near entirety of the Eastern Seaboard for the remainder of the week, which could turn into a widespread demand-dampening event that could result in a larger gas storage build for the reflective storage week.
Last week, the sentiment in gas futures had become a bit overly bearish in a relatively short time—a dynamic recognized by some large hedge funds which instigated a short-covering, illustrated by the market spiking into the $7.20s mmBtu region on Monday to start the week.
However, because the rally was engineered as an opportunity to squeeze shorts out of the market on a very short-term basis, the buying quickly turned to profit-taking as the hedge funds reversed their positions.
U.S. utilities likely added a bigger-than-usual 84 billion cubic feet (bcf) of natural gas to storage last week as milder weather kept heating demand for the fuel low, a Reuters poll showed on Wednesday.
The forecast injection for the week ending Nov. 4 compared with a build of 15 bcf during the same week a year ago and a five-year (2017-2021) average increase of 20 bcf.
In the week ended Oct. 28, utilities added 107 bcf of gas to storage.
If correct, the forecast for the week ended Nov. 4 would lift stockpiles to 3.585 trillion cubic feet (tcf), about 0.9% below the same week a year ago and 1.9% below the five-year average.
The weather was not as cold as usual last week.
There were around 54 heating degree days (HDDs) last week, lower than the 30-year normal of 88 HDDs for the period, according to Reuters-associated data provider Refinitiv.
HDDs, which are used to estimate demand to heat homes and businesses, measure the number of degrees a day's average temperature is below 65 Fahrenheit (18 Celsius).
The return to service of the Freeport LNG export facility in Texas, slated for this month, remained in question Wednesday.
After a protracted outage dating to a June fire, the Texas liquefied natural gas export facility had yet to confirm the status of needed regulatory approvals to reopen.
When it does return, Freeport could pull about 2.0 Bcf/d of natural gas from domestic circulation to meet export demand. But if that does not happen this month, US demand would prove lighter than expected and supplies could further swell in the near term, adding to price pressure, Goldman Sachs analyst Samantha Dart said in comments carried by naturalgasintel.com.
Dart doesn’t expect Freeport to relaunch until December and, as such, raised expectations for storage to stand at 1,655 bcf at the end of the coming winter, up from 1,530 bcf.
Analysts at The Schork Report, meanwhile, said NYMEX “crashed as doubts of Freeport LNG’s return mount.”
Against that backdrop, EBW Analytics Group senior analyst Eli Rubin sees a “soft medium-term outlook.”
The next week of trading “could remain volatile as the market gyrates between bearish fundamentals and coming cold,” Rubin said.
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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.
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