It took a while but it finally seems to be happening. The argument that natural gas prices can’t be at the high $2 levels with production at record highs and the weather getting cheerier by the day seems to be sinking into the market.
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In under a week, gas futures on the New York Mercantile Exchange’s Henry Hub have lost nearly 6%, the most since February for such a stretch. Prices are also hovering near three-year lows.
With the U.S. Energy Information Administration expected to report at 10:30 AM ET (14:30 GMT) today its third weekly gas inventory build for spring, questions surface on whether gas bears will find ammunition from the numbers to take the selling into overdrive.
Forecast For Unusually Large Gas Storage Build
Analysts’ consensus is that gas in storage expanded by 87 billion cubic feet last week. Historical data shows such a build would already be large for this time of year, a phenomenon caused by friendly spring weather that has spared most American homes from having to turn on the heat lately.
Data showed there were just 58 heating degree days last week versus a 30-year normal of 85 HDDs and 114 HDDs in the same week a year ago.
HDDs measure the number of degrees a day's average temperature is below 65 Fahrenheit (18 Celsius) and are used to estimate demand to heat homes and businesses.
Reuters reported that early estimates for storage builds in the current week range from 65 bcf to 91 bcf, putting further pressure on the fundamental outlook for gas.
Fragile Support At $2.50
Should the inventory number reported by the EIA today markedly exceed expectations, the support level of $2.50 per million British thermal units for Henry Hub’s benchmark May gas contract, which bulls were clinging onto, might become passé too.
Kent Bayazitoglu, analyst at Gelber & Associates in Houston, remarked wryly in his Tuesday post on gas that “on the week before the Easter Sunday, it is appropriate that storage is again rising”.
He added:
“The market continues to grind lower and the next target is $2.50.”
“The last time front month natural gas traded below $2.50 was three years ago during the first few days of June of 2016. Since then the market has made about six attempts to break below $2.50 and has failed.”
'Strong Sell' Call On Front-Month Gas
Even so, Investing.com has support as low as $2.401 on its daily technical outlook for May gas, which it deems a “Strong Sell”. On Monday, May gas hit 2016 lows of $2.503, just shy of snapping key support.
Scott Shelton, energy futures broker at ICAP in Durham, N.C., noted that the market suffered from “continued fund selling in the front-end that was forcing longs to liquidate as well”.
Bayazitoglu was a little more optimistic, saying that unless Wednesday’s storage expansion number came in the “high triple digits, the market will likely wait until after the long weekend to break below $2.50.”
Coal Substitutions For Gas Seen As ‘Maxed Out’
But regardless how the spot contract fares, he expects Henry Hub’s far-out future months and calendar strips to continue their decline, noting that the January 2020 contract was already struggling to stay above $3 while the pre-2024 strip was almost wiped clean of $3 pricing.
And while bulls were hopeful of seeing demand spike from utilities increasingly using cheaper gas than coal for their fuel mix, Bayazitoglu said such switching was “mostly maxed out, so there is not much to fundamentally stop the market from falling further.”