Memo to gas bulls: The wait for $3 pricing may take longer than thought.
Natural gas futures on New York’s Henry Hub were well below the $3 per mmBtu, or million metric British thermal units mark on Wednesday, despite forecasts showing a likely drawdown of 120 bcf, or billion cubic feet, from storage during the week ended Dec. 11.
For four weeks in a row, the US Energy Information Administration reported some of the most bearish gas inventories for a cold season, with a build as much as 31 bcf at one point and a draw as little as 1 bcf toward the end.
The trend finally broke during the week ended Dec. 4, with a -91 bcf slump in storage, as unseasonable warmth since November gave way to the kind of cold more common for this time of year.
While the gas storage report from the EIA at 10:30 A.M. ET (15:30 GMT) today could show a drawdown 33% higher from that week, according to a consensus of analysts’ estimates, it did little in nudging the market toward $3 pricing, important to the winter psyche of bulls.
In Wednesday’s session, natural gas prices spent another relatively quiet day consolidating last week’s 5% recovery from the previous week’s 9% plunge.
Henry Hub’s January through May 2021 contracts were all compressed within a five-cent window in the mid-$2.60s to $2.70, even as the US Northeast’s first major snowstorm of this season left a 12 inch pile in some areas.
Next Few Sessions Crucial For Breakout Or Breakdown
Dan Myers, analyst at Houston-based gas risk consultancy Gelber & Associates, told the firm’s clients in an email on Wednesday:
“Each of these contracts will be coiled for a breakout (or breakdown) in the next few sessions depending on sentiment that results from tomorrow’s storage report and upcoming weather model runs.”
This was notwithstanding the fact that snow cover leads to risks for much below-normal temperatures in the Northeast over the next few days, before things start to thaw out going into the mid-range, he said. The Northeast is the largest gas-fired heating region in the United States.
According to Gelber & Associates, the overall 15-day weather forecast was in line with 10-year normals and will contribute to several hefty, triple-digit storage withdrawals late this month.
The firm is projecting a 161 bcf draw in the coming week’s EIA report, followed by declines of 124 bcf and 146 bcf in the final two weeks of the year.
Even so, some spots of warmth in the 11-15-day calendar could send confusing signals to hedge funds and other market participants, delaying a return to $3 pricing.
Mixed Weather Signals
Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, underscored this phenomenon in a note on Wednesday, saying:
“The next few weeks of data will be interesting as lower prices should have induced more demand for NG which could result in larger than expected draws in Stats and perhaps add some additional support to prices. As always, the market remains a weather bet and even the people that get paid lots of $$ to tell us what they think seem clueless past day 7.”
More weather uncertainty came from forecaster Bespoke Weather Services. According to naturalgasintel.com, Bespoke warned of inconsistent weather models all week, “so we must expect swings in forecast demand through the end of the week.”
The forecaster added:
“While the late-month situation remains a lower confidence one, a failure of cold to materialize would imply that the La Niña state is able to resist any notable shift eastward in tropical forcing.”
This, Bespoke said, could keep the overall warm state rolling into January, absent a strong North Atlantic Oscillation block.
“This is what all of the long-term climate modeling suggests will occur, and is our lean as well, as even if we are to get colder in early January, we are not convinced of its durability.”
The Global Forecast System model, meanwhile, gained some demand for the Dec. 24-27 period, but remained mild in the days before and after that period, naturalgasintel.com said, citing data from NatGasWeather.
It said the GFS model was colder for Dec. 25-27, which moved it closer in alignment with the European model. The European model, however, is still more than 20 HDDs, or heating degree days, colder compared to the GFS. HDDs, used to estimate demand to heat homes and businesses, measure the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 degrees Celsius).
LNG Flows Back to Normal After Brief Outage
On the LNG, or liquefied natural gas front, naturalgasintel.com noted feed gas flows to US terminals moved back above 11 bcf on Wednesday after plunging below 10 bcf on Tuesday due to an overnight utility plant trip that resulted in all three liquefaction trains at Cameron LNG being shut down. The issue was resolved later Tuesday and operations were continuing to ramp up midweek.
In terms of gas technicals, Investing.com’s Daily Technical Outlook is maintaining its “Buy” call on Henry Hub’s front-month January contract, with a three-tier Fibonnaci resistance, first at $2.690, then $2.709 and $2.359.
Should the front-month turn bearish again, then Fibonacci support will likely be from $2.634 through $2.616 and $2.588.
In any case, the pivot point between the two is $2.662.
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.