From the threat of being hurtled to sub-$2 levels, natural gas futures are back near the pivotal $3 support—a symbolic deference to the spirit of Thanksgiving that has bulls in the heating fuel saying thanks to weather patterns turning their way.
Just last week, the front-month gas contract on New York’s Henry Hub tumbled to early October lows of $2.53 per mmBtu, or million metric British thermal units, in a selloff due to weeks of unseasonably warm weather.
While temperatures haven’t mounted an 180-degree turn yet, forecasts indicating a distinctive return to cooler days in the week ahead have put a floor under gas prices, propelling the front-month to almost $2.90 in anticipation of increasing demand for heating.
In fact, some of the demand actually filtered through to the market, in terms of additional heating for homes, during the week ended Nov. 20—despite the adverse price action then.
A Cooler Patch In A Still Warmer-Than-Usual Week
More people cranking up the heat, especially in key gas-fired heating zones such as the U.S. Northeast, likely led to an 18 billion cubic feet withdrawal from inventories last week, analysts concluded ahead of the Energy Information Administration’s weekly storage report on gas due at 10:30 AM ET (15:30 GMT) on Wednesday. The EIA report is being released a day earlier than usual due to Thursday’s U.S. Thanksgiving holiday.
In the previous week to Nov. 13, gas stockpiles rose by 31 billion bcf versus the 15 bcf draw expected by analysts, as warmer conditions led to very little gas burns for heating.
The weather was warmer-than-normal last week with 107 heating degree days (HDDs), compared with a 30-year normal of 125 HDDs for the period. 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).
While last week’s anticipated gas draw comes as a relief for gas bulls, after the build of the previous week, the drop still pales to the 47-bcf decrease during the same week a year ago and a five-year (2015-2019) average withdrawal of 37 bcf for the period.
Dan Myers of Houston-based gas risk consultancy Gelber & Associates wrote to the firm’s clients on Tuesday that temperatures will trend a little cooler this week and into early next week within a still warmer-than-usual pattern.
Myers wrote in an email:
“Warmth remains the rule at the front end of weather forecasts and will limit demand for the next several days. However, expectations for heating demand going into early December have taken further strides forward today with forecasts for below-normal temperatures extending from the South Central to the East in about a week’s time.”
“As a result of stronger heating demand expectations, storage withdrawals next month have been adjusted downward and are taking on a more supportive look. However, the market must still process bearish withdrawals for the next couple of weeks as the remainder of November’s mild weather moves through.”
HDDs Back To Near 10-Year Norm
Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, held a similar view, writing to his clients on Tuesday:
“HDDs … are nearly back to the 10-year normal, which in many trader’s view is bullish due to a strong weather normalized supply & demand. On the flip side, production is staying stubbornly high and surprising many which is offsetting this bullishness.”
“The market will move in the direction of the weather forecast, which continues to trend cooler, though the durability of the forecast remains in question beyond the 11-15 (day period). (Hedge fund) positioning remains quite short though it's going to take above $3 in January to get them out of a small amount of that short.”
Front-Month Gas Turns To “Buy” From Previous “Strong Sell”
Back to gas pricing. With Henry Hub’s front-month moving nearer to the $3 support, Investing.com’s Daily Technical Outlook has, accordingly, adjusted its call on the benchmark gas contract to a “Buy” from the previous week’s “Strong Sell”. Topside resistance for the contract would be $2.89.
Should the front-month buck the trend and turn bearish again, then the base case for support will be $2.63.
As with all projections, we urge you to follow the calls but temper them with fundamentals—and moderation—whenever possible.
Good luck and Happy Thanksgiving.
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.