- Market down almost 20% on the week, defying calls for one of the coldest starts to a winter
- “Wild volatility” could continue next few weeks due to varying weather forecasts
- Analysts expect a 93-bcf withdrawal from gas storage last week vs. the previous 50-bcf draw
Natural gas is one of the most perplexing markets in the world. But what’s happened with this trade over the past month could make perplexing an understatement.
With the kind of daily market gyrations that would leave even Centaurus legend John Arnold dumbfounded, the hedge funds that decide the direction for gas futures on the New York Mercantile Exchange are presiding over gut-wrenching volatility just as the United States is about to experience one of the coldest starts to a winter.
Usually, at a time like this, gas prices would be going one-way, and it’s a no-brainer which way that would be: Up. Yet, with the weather being weather, forecasts vary almost daily on when precisely the cold would peak, how long it would last, and most importantly, whether there will be an imminent comeback in the chill to ensure the bulls prevail over any bear squeeze.
'Never A Dull Moment'
Houston-based consultancy Gelber & Associates said in a note issued Wednesday:
“It’s been said that there’s never been a dull moment in the US natural gas market in 2022, and the most recent price action in NYMEX gas futures validates that point."
Making its point, Gelber noted that Tuesday’s purge of long positions on NYMEX’s front-month natural gas futures came in the middle of an Arctic blast across the lower 48 states that continued into a third straight trading session.
Since hitting a high of $7.036 per million metric British thermal units, or MMBtu, last Thursday, prices have tumbled 22%. As winter 2022 officially arrived on Wednesday, natural gas bulls got a reprieve from the selling that has gutted the market. But there was no telling if an uptrend would immediately emerge as traders remained split on how cold it would be the week after Christmas.
Analysts say the more than 20% walloping taken by gas futures on the New York Mercantile Exchange’s Henry Hub since the end of last week was due to mixed weather readings that a widespread warm-up will blanket most of the United States in mild temperatures by next week after this weekend’s freeze.
During Wednesday’s session, natural gas for January delivery on the hub settled up 0.6 cents at $5.3320 per MMBtu. Week-to-date, the benchmark gas contract was down $1.27 per MMBtu, or 19%. In Tuesday’s trade, January gas hit a nine-month low of $5.256 per MMBtu.
Gelber continued in its note,
“With such massive selling action that has occurred in the last few days, NYMEX gas futures prices have been over-cooked to the downside. At this juncture, prices are not only technically oversold but are also fundamentally oversold and are due for some sort of relief rally, which may be in the process of happening.”
More 'Wild Volatility?'
According to Gelber’s projections, natural gas could continue seeing what it called “some wild volatility” over the next few weeks. This is because daily storage draws were projected to top out at more than 53 billion cubic feet daily on Christmas Eve before incrementally declining for several consecutive days to potentially 4.5 bcf/d by New Year’s Day.
Similarly, the most recent weather models indicated that slightly above-average temperatures may linger into the first week of January before the next major Arctic outbreak emerges.
Some analysts, particularly those on the long side, are looking out further into longer-range weather forecast models and indicators, including the European ECMWF and CFSv2 models, which were already pointing to the formation of yet another big Polar event to dominate much of the nation during the second week of January.
There are indications that the current frigid weather pattern may even reload again in late January or early February. Gelber, on its part, believes that “by the end of the next ten days, natural gas inventories will have declined under 3,000 bcf with a storage deficit versus the five-year average approaching 200 Bcf.”
NatGasWeather concurs with that. In comments carried by naturalgasintel.com, the forecaster said the final days of this week would bring “one of the coldest outbreaks of the winter” to date, with a “dangerous Arctic blast” delivering frigid temperatures to the Rockies and Plains and down into Texas.
“With a hard freeze over production areas, flows are expected to drop by several Bcf to near 95 Bcf/d, if not lower.”
Because the current frigid weather system is already unfolding, well freeze-offs are already starting to happen, with dry gas production volumes declining to 99.5 bcf/d, the lowest level in nearly three months. Volumes topped out at around 102 Bcf/d within the last few weeks. A further reduction in dry gas volumes is expected to occur in the days ahead once the brunt of the coldest conditions plunges further south into Texas, the Gulf coast states, and the Southeast areas of the US.
Furthermore, recent dry gas production stats show that volumes have plateaued in recent weeks, which isn’t a bearish catalyst. Because today is the first day of winter and the season lasts through Mar. 20, 2023, there is the potential for lots more Arctic weather to materialize over the next three months. Should any future Polar events coincide with the reopening of the Freeport LNG export facility in the weeks ahead, it would also be an underpinning factor for gas futures prices.
In addition to blizzard conditions in the Midwest and freezing rains in parts of the Northeast, "subfreezing air is also expected into the South and Southeast, as well as the potential for rare snowfall," NatGasWeather added.
EBW Analytics Group’s senior analyst Eli Rubin said the “looming” demand collapse to start 2023 suggests another leg lower could occur after the near-term cold fades and February becomes the front-month contract next week. He added,
"In the immediate term, however, freeze-off risks over Christmas weekend – with January options expiration and final settlement early next week – could help reinforce support for Nymex gas prices”,
Weather in Texas, in particular, could wreak havoc this week, though analysts said it is not likely to rival February 2021’s, Winter Storm Uri. Wood Mackenzie analysts Colette Breshears and Eric Fell said in an outlook released Wednesday,
“We do not expect a repeat of Uri’s production impacts and associated outages of gas-fired power plants in the Southwest Power Pool) and Electric Reliability Council of Texas territories. This is partially due to weatherization effects following infrastructure improvements and partially from the nature of the storm (this year promises to be extremely cold, yet dry and fast to pass through).”
The arrival of the deep freeze over a holiday weekend, when demand is often “suppressed” versus norms, could also partly help to mitigate impacts, the Wood Mackenzie analysts added.
“Being December, storage levels are much higher, and LNG facilities are on standby to shed demand should conditions warrant.”
Ahead of today’s weekly gas storage update from the Energy Information Administration, or EIA, a Reuters poll showed US utilities likely pulled 93 bcf from stockpiles during the week ended Dec. 16, versus a 50-bcf drawdown in the prior week to Dec. 9.
That withdrawal for the week ended Dec. 16 also compares with a withdrawal of 60 bcf during the same week a year ago and a five-year (2017-2021) average of 124 bcf. The forecast for the week ended Dec. 16 would cut stockpiles to 3.319 trillion cubic feet (tcf), about 1.5% below the same week a year ago and 0.5% below the five-year average.
There were around 163 actual heating degree days (HDDs) last week, lower than the 30-year normal of 171 HDDs for the period, according to Reuters-associated data provider Refinitiv. HDDs, which are used to estimate demand to heat homes and businesses, measure the number of degrees a day's average temperature is below 65 Fahrenheit (18 Celsius).
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.