Heard of the perfect offset? Look no further than the natural gas market for one.
At Wednesday’s settlement, Henry Hub futures on the New York Mercantile Exchange were up 10.3% on the week, almost offsetting all the 10.6% decline from the previous week.
The catalyst for the rebound, if reports are to be believed, is expectations for cold weather in the coming week—not the last week.
Temperatures were higher than is typical for this time of year last week, resulting in a correspondingly smaller draw in gas from storage for heating, analysts’ estimates showed.
But this week’s cold—and forecasts for more frigid temperatures for the week ending Feb. 5—have transformed the trade’s expectations, turning a market that was exceedingly bearish just a week ago into one where shorts were suddenly being squeezed.
It was testimony to how finicky weather patterns had made the winter play in gas an extraordinary game of nerves this year.
Natural gas isn’t known as the “Bucking Bronco” of the energy space for nothing, with daily swings of 15% and beyond regarded as fair game.
Yet, what makes the 2020/21 winter season different is the late emergence and unsustainable cold that has forced traders to rework their demand projections for gas-driven heating and, consequently, impacted changes to the storage situation of the fuel.
Forecasts Show Greater February Cold Now
Gelber & Associates, a Houston-based consultancy on gas market risk, said in a note to its clients on Wednesday:
“Weather forecasts strengthened further today and continue to progress cold towards the eastern US in the 11-15 day period.”
“The reliance on storage has risen significantly in the current week which is likely to result in a +200 bcf decrease in the next report.”
Industry analysts in general expect the U.S. Energy Information Administration to cite a drawdown of 136 bcf, or billion cubic feet, in its gas storage report for the week ended Jan. 22, due at 10:30 AM ET (15:30 GMT).
If on target, that would be almost 50 bcf lower than the 187 bcf draw logged for the previous week to Jan. 15.
Gas burns for heating likely slumped last week as there were just 173 heating degree days (HDDs), compared with a 30-year normal of 201 HDDs for the period, data from Refinitiv showed.
HDDs, used to estimate demand to heat homes and business, measure the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 degrees Celsius).
The front-month in Henry Hub gas futures plumbed a three-week low of $2.414 per mmBtu, or million metric British thermal units, last week on expectations for the smaller-than-usual drawdown from storage that week. Yet, by Thursday’s early trading in Asia, Henry Hub’s front-month had crawled out of that hole, hovering at $2.665.
Adds Gelber:
“Bullish withdrawals are now expected for the early part of February. Since last week, deepening cold weather forecasts have added over 70 Bcf to cumulative withdrawal expectations week through the week ended Feb. 12.
“This helps explain the late resurgence in next month’s futures, which are up nearly 30 cents (~12%) since last Friday’s settlement and will expire in the upper-end of the February contract's trading range.”
LNG Pickup Helps Too
A strong pickup in demand for LNG, or liquefied natural gas, is also shoring up sentiment after last week’s heavy fog along the Gulf Coast that prevented some vessels from entering and leaving LNG facilities, naturalgasintel.com said in a report.
Weekly LNG exports were estimated to be above 11 bcf on Wednesday and near record levels, the industry portal reported, quoting Wood Mackenzie analyst Anthony Ferrara as saying:
“The bounce back in LNG export levels after the fog…along with increased demand driven by this cold weather have helped to lift the prompt month.”
The pickup in LNG shipments and steady build in cold forecasts have combined to positively impact the market, Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, said, adding:
“We continue to get colder on the models and prices are rallying and showing that early February could be colder than the 30-year normal.
“I see the high end of the range being $2.75 to $2.80 in the front and the summer as I continue to think we are in a range that is likely 2.40 to 2.80 until spring.”
Daily Technical Outlook For Gas Turns To “Buy”
Investing.com’s Daily Technical Outlook on Henry Hub’s front-month has also turned into a “Buy” from the previous week’s ”Strong Sell.”
Should the contract extend its bullish trend, a three-tier Fibonacci support is forecast, first at $2.775, then $2.804 and later at $2.851.
Should the trend reverse and turn negative, then a three-stage Fibonacci resistance will likely be first at $2.681, then $2.652 and later at $2.605.
In any case, the pivot point between the two is $2.728.
As with all technical projections, we urge you to follow the calls but temper them with fundamentals—and moderation—whenever possible.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. He does not own or hold a position in the commodities or securities he writes about.