Is it over, the winter trade in gas?
Despite last week’s bone-chilling freeze, natural gas futures have lost 15% from their highs, as suddenly all bets seem to be on an unusual early warm spell for March.
Anyone who has traded in natural gas knows that the market is prone to some of the wildest swings in the commodities sector as it is a bet on future weather.
It moves from one extreme—such as an Arctic blitz that shrouded Texas, resulting in a freeze so bad that oil and gas couldn’t flow in producing basins—to another, where forecasts are pointing to spring-like weather that’s at least a month early.
Since reaching a 3-½ month peak of $3.32 per mmBtu, or million metric British thermal units, on Thursday, gas futures on the New York Mercantile Exchange’s Henry Hub have fallen in every session, trading below $2.80 at the time of writing.
Gelber & Associates, the Houston-based consultancy for gas market risks, laid out the change lucidly on Wednesday in an email to its clients, some of whom were expecting more winter extremity in March that could have carried the market to $4 pricing or around there.
Draw Expectations Aside, Market Has Priced In Texas Freeze
The Gelber note arrived as traders hunker down to await the Energy Information Administration’s gas storage report for the week ended Feb. 19. Analysts are predicting the EIA could report a drawdown as large as 333 bcf, or billion cubic feet, from storage, as people in Texas and other snow-struck regions turned the heat on maximum to survive last week’s cold.
If accurate, that would be the second largest withdrawal on record and the first time that gas inventories fall below the five-year (2016-2020) average since the end of 2019. The biggest storage withdrawal in history was 359 bcf in January 2018.
To put it in context, utilities delivering heat to American homes and businesses only withdrew 237 bcf of gas from storage in the prior week ended Feb. 12.
During the same week a year ago, the drop in gas inventories was just 145 bcf. The five-year (2016-2020) average was, meanwhile, 120 bcf.
A 333-bcf drawdown would leave just 1.948 tcf, or trillion cubic feet, in underground gas caverns, some 7.4% lower than the five-year average and 13.1% below the same week a year ago.
Last week's weather was super cold—with 264 heating degree days (HDDs), compared with a 30-year norm of 175 HDDs for the period, data from Refinitiv showed.
HDDs, used to estimate demand to heat homes and business, measure the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 degrees Celsius).
Said Gelber in its note, shared with Investing.com:
“Even with the expected mammoth draws to be reported by the EIA, the damage of the recent cold flurry is done and future withdrawals are likely due to begin tempering … in anticipation of a segue into springtime trading.”
“Additional futures volatility is likely to continue. The current period through early March is forecasted to be slightly warmer than normal, with no major swings currently anticipated.”
Warmer, Normal Trends Next 15 Days
Scott Shelton, energy futures broker and analyst at ICAP in Durham, North Carolina, concurred largely with Gelber’s findings, saying he expected “warmer trends, or at least back to normal trends for the next 15 days.”
Shelton added, in the note seen by Investing.com:
“Production has bounced back to nearly normal. LNG back to normal and demand, of course, is tanking due to a lack of weather.”
“Bottom line to me is the market is very long. And it’s not getting fed any new information and that suggests the pain trade may still be lower.”
Industry portal naturalgasitel.com said in a blog that weather models continued to show mostly a warm pattern for March, with only brief bouts of cold on the radar, and traders appear to “have already closed the book on winter.”
The portal added:
“Any periods of chilly air are expected to be brief, and not nearly as extreme as last week’s Arctic blast.”
NatGasWeather said weather models are forecasting another modest bump in demand by the middle of next week—before yet another bearish pattern sets up from Mar. 4-9.
The forecaster added:
“Either way, the coming pattern isn’t as cold as needed to intimidate with national daily heating degree days below normal most of the next 15 days.”
“But what makes the pattern most bearish is a warmer-than-normal ridge expected to rule most of the U.S. Mar. 5-9, with highs of 40s to 60s across the northern U.S. and highs of 60s to lower 80s across the southern U.S.”
The Global Forecast System was still a little colder than the European model for Monday through Wednesday (Mar. 1-3) by advancing a cold front out of Canada more aggressively into the northern United States. The European model reflected only a glancing shot of cold air.
Texas Gas Production Returning, But Slowly
After an unseasonably warm start to the 2020/21 winter, snowstorms have descended upon the central and eastern United States in recent weeks, boosting demand for natural gas and heating oil.
Typically known for its sweltering weather most of the year, Texas initially looked like a white blanket after the blitz in the state known for maintaining temperatures of between 60°F (15.6°C) and 70°F (21.1°C) throughout the year.
More than four million homes in Texas did not have power immediately after the state's worst snowstorm in 30 years as the state’s electricity grid was knocked out, and many did not have water supply for more than a week.
And while oil and gas production has resumed in recent days, both drillers and refiners in Texas were struggling to get back to optimal operation.
In the restarted Permian Basin, production was reported to be nearing 11 bcf per day, still down from the pre-storm peak of 12.4 bcf/d.
Feed gas volumes for LNG, or liquefied natural gas, had crossed back above 10 bcf/d, and the backlog of empty LNG vessels in the Gulf of Mexico appeared to be leveling off.
Gas Daily Technicals Call For A 'Sell'
On the technical front, Investing.com’s Daily Outlook is calling for a “Sell” on Henry Hub’s front-month.
Should the contract extend its negative trend, a three-tier Fibonacci support is forecast, first at $2.83, then $2.81 and later at $2.79.
In the event the market reverses, then a three-stage Fibonacci resistance is expected to form, first at $2.88, then $2.89 and later at $2.92.
In any case, the pivot point between the two is $2.85.
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.
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