It’s late fall but the weather in much of the Eastern United States feels like late summer.
And that could be a problem for hedge funds holding onto large long positions of natural gas, in anticipation of demand that has yet to emerge in key gas-fired heating regions.
The front-month natural gas futures contract on New York’s Henry Hub rallied for a second straight day on Wednesday after six previous sessions in the red—its longest losing spell since a 12-day bearish streak between mid-September and early October 2019.
The contract also returned to the $3 per mmBtu, or million metric British thermal units, support that had been critical to the confidence of gas bulls.
Yet, the 15% slide during the sell-off was troubling enough that analysts at gas risk consultancies sounded out a warning to their clients on Wednesday about warmth persisting at this time of year.
One of them, Dan Myers of Houston-based Gelber & Associates, said while temperatures were expected to fall in the coming days, they wouldn’t drop sufficiently enough to generate cold. He explained in a note:
“The upcoming weather outlook has become slightly more supportive over the last couple of days, as brief spurts of cooler than average temperatures will now attempt to make their way East at times during the next ten days.”
“Nonetheless … relative warmth still largely holds by the end of the period. Overall, total degree days are forecast about 8% below normal over the next fifteen days.”
Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, invoked a similar warning, using Hollywood star Leo DiCaprio as his prop:
“Overall, positioning remains quite long from the humans on the forward curve. I fear that some of the strips could see some selling if we drop any further. Systematic players are also long and may unemotionally sell while the rest of the market sends around MEMES of Leonarda DiCaprio screaming ‘I ain’t leaving’.”
“Another 5 Celsius or so in Summer 21 and Winter 21, the only thing that may be ‘leaving’ is some P&L,” Shelton added, referring to profit and loss.
Naturalgasintel.com, in its daily market blog, said there were risks for more warmth late this month and into December, increasing the odds of price declines in coming sessions.
Citing weather forecaster Bespoke, the portal said:
“The bearish weather remains the major obstacle for bulls, and we expect that to continue. As it stands right now, we do not have a single day in the forecast that is colder than normal.”
The weather alert for hedge funds came as the trade expected the Energy Information Administration to report that weekly storage of US natural gas had declined by less than 10 bcf, or billion cubic feet, last week compared to to the previous week’s 36 bcf.
Myers at Gelber & Associates said:
“Implications of this marginally cooler outlook have not yet led to significant adjustments in upcoming storage changes that would signal a strong turnaround for prices.”
“All indications are that a net storage injection is likely to come out of the relatively weak demand of the current storage week before more normal storage withdrawals resume.”
What Exactly Do The Weather Readings Say?
A deep dive into a note shared by Dominick Chirichella of the Energy Management Institute in New York showed briefly cooler conditions across the Central/East will give way to warmer conditions again over the next couple of weeks.
Record warmth will relent across the East and South during the 2-5 day period, but above-normal temperatures will likely stay, Chirichella said.
He said a brief hit below normal temperatures will impact the North Central US, but above normal temperatures will rebuild later in the period. Temperatures will be below normal across the Northwest.
Above normal temperatures will also build across the West and Central US during the day 6-10 period, Chirichella added.
Back to gas prices, Investing.com’s base case for Henry Hub’s front-month shows the market beneath $3 again to find three intermediate levels of support: first at $2.943, then $2.8542 and finally at $2.7972.
Our Daily Technical Indicator for Henry Hub’s front-month, meanwhile, shows “Buy” to “Neutral,” with resistance pegged first at $3.1799, then $3.204 and finally at $3.2459.
As with all projections, we urge you to follow the calls but temper them with fundamentals—and moderation—whenever possible.
Good luck.
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.