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Despite Polar Vortex, There Is Little Joy For Natural Gas Bulls

Published 02/07/2019, 03:37 AM
Updated 09/02/2020, 02:05 AM
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Is the winter pretty much over for natural gas bulls?

It’s a question confounding long position holders on the Henry Hub as the gas market awaits potentially explosive drawdown data today from last week’s polar vortex—even as current warm temperatures in some parts of the U.S. Northeast suggest that next week’s numbers could be totally bearish.

Natural Gas 5-Hour Chart

Shifting weather fundamentals have sent natural gas futures on a roller coaster ride over the past two weeks, moving from above the key $3 per million metric British thermal units on Jan. 25 to nine-month lows of $2.639 per mmBtu on Feb. 5.

Dominick Chirichella, who heads the Energy Management Institute in New York, said a new round of arctic air rebuilding in the north-central U.S. over the next 11 to 15 days could set up a few more days of below-normal temperatures.

This is expected to be offset by another batch of unseasonably mild weather across central and eastern U.S. that could bring temperatures to far above normal, he said.

Few Want To Be Long Gas As Cold Weather Proves Short-Lived

Added Chirichella: “Market participants are reluctant to get on board from the long side as cold weather has been short-lived.”

Scott Shelton, energy futures broker for ICAP (LON:NXGN) in Durham, North Carolina, said the March-April Henry Hub spread, which marks the end of the winter withdrawal season for gas and the start of the injection period for summer, was bereft of volatility—a sign that few surprises were expected in the winter-spring transition.

Although spring doesn’t officially start till March 21, Shelton said it appeared meaningless for gas bulls to be building new winter positions.

The analyst, who pointed out that he wrote his Wednesday morning gas report “sitting in my shorts”, added:

“The issue remains that colder-than-normal weather in the last two weeks of Feb is not going to generate enough HDDS to create any massive shift in end March – which is why HJ doesn't care at all and is still near its lows.”

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. HJ denotes the March-April contract symbols for natural gas.

Reuters said on Wednesday there were 241 heating degree days during last week’s polar vortex, compared with 167 HDDs in the same week a year ago and a 30-year norm of 196 HDDs for the period.

The swing to subzero temperatures across the U.S. Midwest to Northeast from the previous week’s moderate cold is expected to factor deeply in gas drawdown data due from the Energy Information Administration at 10:30 AM ET (15:30 GMT).

Analysts polled by Reuters estimate that U.S. utilities likely pulled a vastly larger-than-normal 245 billion cubic feet of natural gas from storage last week as freezing weather increased heating demand across the country. The drawdown for the week ended Feb. 1 compared with a withdrawal of 116 bcf a year ago and a five-year average decrease of 150 bcf for the period.

In the previous week to Jan. 25, utilities removed 173 bcf from underground salt caverns that serve as storage for gas.

Forget Winter Play, Little Incentive For Summer Hedging Too

With the winter play diminishing, traders have actively been looking for the right summer hedges to place if gas in storage remains low and a potential heatwave in July-August will mean inadequate fuel to power airconditioners. But record production of gas has ensured that acute demand periods like last week are quickly filled.

Shelton noted that the JV spread covering the mid-spring period of April through mid-fall October also had little volatility for traders to exploit now. Referring to front-month hedge fund positioning, he said:

“Though the pull from salt should be pretty large last week, I think that the natural bid for NG spreads this summer is now diminished, unlike last summer, and weakness will continue until we have a significant short from CTAs in the front."

Dan Myers, gas analyst at Gelber & Associates in Houston, concurred with Shelton, adding:

“The first full week of February is likely to result in a storage decrease of less than 100 bcf, washing out much of the previous change's effect on the storage deficit.”

“Withdrawals later in February still have the chance to come in larger than the five-year average as cold in the western and central U.S. tries to push east at times. But the overall normal-to-mild look that is persisting in areas of the Southeast and Mid-Atlantic in long-term forecasts has so far prevented this from moving the needle much on price.”

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