As frightful as the Texas deep-freeze blitz and the euphoria of $3 plus pricing were three weeks back, a new challenge has crept into natural gas: the dawn of spring weather and keeping support at the high $2 levels.
With temperatures in the upper 40 to 70 Fahrenheit range permeating much of the Lower 48 US states on Wednesday and likely to persist—despite some cool air, chilly rains and potential snow in the East before the weekend—current pricing of Henry Hub futures may seem generous to some.
Yet, if the volatility of the past weeks is anything to go by, it’s that the market’s upside is quite far from done.
Wednesday’s settlement of Henry Hub’s front-month at $2.85 per mmBtu, or million metric British thermal units, comes after the Feb. 17 peak of $3.32 set by the Texas storm and $2.70 low since.
The weather aside, another phenomenon is unfolding after last week’s second largest withdrawal of gas from storage to meet runaway demand for heating from the frigid conditions forced by the mid-February snowstorms, which also led to the disruption in Texas production.
Early Summer Storage Squeeze?
Now, traders are looking at the possibility of a summer squeeze storage that could come faster than expected, particularly after the 338 bcf, or billion cubic feet, depletion during the week ended Feb. 19. The record withdrawal so far—359 bcf—was in January 2018.
EBW Analytic Group said on Wednesday, in a note reported by industry portal naturalgasintel.com:
“The natural gas storage comparison versus the five-year average has tightened by a startling 405 Bcf over the past four weeks—from a 244 Bcf surplus to a 161 bcf deficit—and the deficit may surpass 225 Bcf.”
Still, it added that over the next three weeks, “the trajectory of the storage comparison versus the five-year average may flatten” as temperatures rise and heating demand fades.
Officially, spring does not start till Mar. 20.
Yet, the National Weather Service forecasts that by early next week, temperatures were expected to rise into the 50s in the US Midwest and East and the 80s in the South and parts of the West.
One Last Storage Withdrawal Before Spring
Houston-based gas market risk consultancy Gelber & Associates said in its own note to its clients, also issued Wednesday and sighted by Investing.com:
“As heating demand continues to ramp down, and weather forecasts continue to look more average as we head closer towards spring which begins the 20th, expected natural gas withdrawals will quickly temper down.”
“Of course, it goes without mentioning that a strong return in production now sitting at 91.1 bcf per day is a large contributor to diminishing future withdrawals. That being said, one final rather large storage withdrawal is anticipated for the week ending Feb. 26.”
And that withdrawal, to be announced by the US Energy Information Administration at 10:30 AM ET today, could see another 136 bcf leave the system.
Utilities withdrew 338 bcf of gas from storage in the prior week ended Feb. 19 when the February freeze caused gas wells and pipelines to freeze across much of the central United States. That was the second-biggest withdrawal on record.
The forecast of 136 bcf compares with a fall in inventories of 119 bcf during the same week a year ago and a five-year (2016-2020) average withdrawal of 81 bcf.
If analysts are on target, the draw during the week ended Feb. 26 would take stockpiles to 1.807 tcf, or trillion cubic feet—10.7% lower than the five-year average and 14.8% below the same week a year ago.
Last week's weather was slightly warmer than usual with 157 HDDs, or heating degree days, compared with a 30-year norm of 164 HDDs for the period, data from Refinitiv showed.
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).
Early estimates for the current week to Mar. 5 are showing that draws could have moderated from 150 bcf to 49 bcf, with a mean decrease of 85 bcf.
That would compare with a 72-bcf withdrawal during the same week last year and a five-year average decline of 89 bcf.
Bespoke Weather Services, in a report quoted by naturalgasintel.com, said the EIA storage report will prove that “once colder momentum comes to a halt in the forecasts … it will become tougher to advance higher from these levels, and a retracement will ensue”.
If fundamentals don’t offer enough help, then technical price models seem mixed too.
Gas Technical Outlook Is 'Neutral'
Investing.com’s Daily Technical Outlook has turned “Neutral” on Henry Hub’s front-month, after a “Sell” in the previous week.
Should the market turn bullish, a three-tier Fibonacci support is forecast, first at $2.87, then $2.89 and later at $2.92.
In the event of a downturn, then a three-stage Fibonacci support is expected to form, first at $2.80, then $2.78 and later at $2.75.
In any case, the pivot point between the two is $2.84.
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. As an analyst for Investing.com he presents divergent views and market variables. He does not hold a position in the commodities and securities he writes about.