Natural Gas: Weather Ambiguity Fueling Market Volatility 

When it’s cold, it’s sometimes biting and when it’s warm, it’s unseasonably tepid—US temperature swings continue to test the mettle of natural gas traders, resulting in volatility that makes it hard for the market to make a clear break in either direction of $6 pricing.

The front-month natural gas contract on the New York Mercantile Exchange’s Henry Hub sank almost 6% Friday, falling below $5.80 for each metric million British thermal unit (mmBtu), before recovering almost all of that loss over three sessions on signs that a pool of Arctic air will cover the near entirety of the United States in the coming days. 

But forecasts for typically lower gas consumption in the run-up to next week’s US Thanksgiving holiday could be another bummer for gas bulls, say analysts poring over weather models.

Alan Lammey of Houston-based gas markets consultancy, Gelber & Associates, said in an email to the firm’s clients on Wednesday that was shared with Investing.com:

“The Global Forecast System (GFS) and European (ECWMF) models are in good accord that below-average cold temperatures will continue to be in play through early next week and will produce an impressive increase in heating demand.” 

“However, the models also see that temperatures will moderate toward seasonally average conditions during the Thanksgiving holiday. The bigger-picture temperature outlook hasn’t changed much in the last 48 hours.”

Bearish Tilt More Than Bullish for Prices/h2

Henry Hub’s front-month December contract, hovering at $6.25 per mmBtu at the time of writing, is range-bound at the lower end of $6, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

In the immediate term, charts show limited potential for December gas’ upside targets that include the 50-week Exponential Moving Average (EMA) of $6.38, the 50-Day EMA of $6.53 and the 100-Day Simple Moving Average (SMA) of $6.91, Dixit said.

“On the bearish side, a sustained break below $5.92 followed by a swing low of $5.72 will indicate further weakness that could bring $4.95 and $4.75,” he said.

“If selling intensifies, bears will try to push for the 200-week SMA of $3.65.”

“On a broader perspective, we see gas prices moving sideways, from a high within $7.27 to a low of $4.74.”

Greater Clarity Needed on Weather /h2

Gelber & Associates’ findings show ambiguity for longer-range weather models in December. While some models suggest that a warmer December will unfold, others are adamant that a below-average temperature month will be anchored in place.

“Greater clarity on this outlook should become more evident in the week ahead,” Lammey wrote.

Industry journal naturalgasintel.com concurred with Gelber & Associates, saying weather models have struggled to determine how much cold air will linger over the Lower 48 US States into the last week of November. 

The site, however, ran an analysis by forecaster NatGasWeather for a potentially colder Nov. 24-28 period.

But that aside, “longer-range forecasts continue to favor a seasonal to slightly bearish pattern for most of the US to start December,” the forecaster added.

Market Clueless on Freeport Reopen/h2

Meanwhile, traders hoping to get a timeline on the reopening of Freeport LNG were left clueless. 

The Texas-based liquefied natural gas export terminal issued a detailed account of what caused the June fire and subsequent closure of the facility. However, it did not provide any update on its reopening, raising concerns that the facility may not be operational again until December or even later.

Any delay in Freeport’s return would be a bearish development for US natural gas, given that it accounts for some 2 billion cubic feet (bcf) per day of dry gas that is liquefied for export. 

Also, the longer Freeport remains offline, it could complicate the situation for Europe, which is dependent partly on US LNG to get through the upcoming winter amid the squeeze on Russian gas supplies in the aftermath of the Ukraine war.

The timing of Freeport LNG terminal’s return to service has captivated the market because the prospect of potential delay into 2023 hampers the entire export demand outlook for gas, naturalgasintel.com said.

“Freeport LNG is likely extending the ongoing outage until 2023 as buyers have been informed to cancel shipments scheduled for November and December due to regulatory and repair delays,” Tudor, Pickering, Holt & Co. analysts said Wednesday in comments carried by the site.

“It also leaves more gas in the Lower [US] 48 [States] that could be used to further fortify storage levels. This could ease supply concerns ahead of winter and, simultaneously, add bearish price sentiment,” they added.

On the other hand, dry natural gas production remained at a record low of just under 100 bcf per day while total natural gas storage, at around 3.6 trillion cubic feet (tcf), sits at a comfortable level for the 2022-23 winter.

The storage level is being closely watched by the trade for an indication of where gas prices could go in the coming weeks.

63-bcf Storage Injection Seen for Last Week/h2

US utilities likely added a much bigger-than-usual 63 bcf of natural gas to storage as mild weather kept heating demand low last week, a Reuters poll showed on Wednesday ahead official storage data due from the US Energy Information Administration at 10:30 ET (15:30 GMT) today. 

That injection for the week ending Nov. 11 compares with a build of 23 bcf during the same week a year ago and a five-year (2017-2021) average decrease of 5 bcf.

In the week ended Nov. 4, utilities added 79 bcf of gas to storage.

The forecast for the week ended Nov. 11 would lift stockpiles to 3.643 tcf, about 0.1% above the same week a year ago and 0.2% below the five-year average.

There were around 70 heating degree days (HDDs) last week, lower than the 30-year normal number of 103 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).

US Railroad Strike Appears On/h2

On the potential for a US railroad worker strike, a third industry union rejected a tentative labor deal this week, increasing the possibility that freight railroad workers will go on strike in December and cause logistical mayhem for coal deliveries to utilities. This would, in turn, possibly cause an increase in natural gas demand. 

Media reported that members of the International Brotherhood of Boilermakers voted against a tentative agreement reached in September. The two largest rail unions, representing railroad engineers and conductors, are holding more votes later this week. The results are projected to be known by early next week around November 21.

Lammey of Gelber & Associates summed it up, saying:

“If, in the next few days, the major weather forecast models continue to trend warmer for late November into December—and if an act of Congress averts a railroad strike—then it wouldn’t be out of the question for NYMEX gas futures prices to tumble further, potentially below $6/mmBtu by next week.” 

“However, this is an awful lot of ‘ifs’ to be considered over the next few days that will all have some notable influences on the near-term price direction of NYMEX front-month gas futures. Therefore, caution is advised.”

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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.