The weather gods must be conspiring to keep the bulls in natural gas happy. Just as the surprising heat that stayed on after the peak of summer, requiring most American households to keep the air-conditioner on longer than typically needed, a rush of cold weather has arrived now in the early days of autumn, when mild weather is usually the norm, prompting the need for heating.
The unseasonable weather patterns are once again spoiling the well-laid plans of market bears who had hoped for some downtime in natural gas demand this week to drive prices down from the stubborn $3 levels seen over the past month.
At present, it is not known if this week’s cold will be a trend or just a flash in the pan.
More Immediate Cold After This?
Washington Post weather forecaster Ian Livingston thinks the early blast of record cold and snow across much of the central US in recent days will be followed by “significant wintry temperatures, even snow” in many places of the North-East and Mid-Atlantic over the next week.
However, the National Oceanic And Atmospheric Administration’s Climate Prediction Center says it will be a mild winter for much of the United States. The center cites the El-Nino weather phenomenon and the warming of the Pacific Ocean as reason.
Whether the El-Nino prevails over the longer term, the weather gods seem to be favoring gas bulls now by blowing frigid temperatures that are keeping natural gas futures on the New York Mercantile (NYMEX) near 9-month highs, despite growing storage levels of the fuel from record high production.
Dan Myers, natural gas analyst at Gelber & Associates in Houston, said in a commentary:
“The market is now focused on the sudden snap to cold weather taking place over much of the country and anticipates a corresponding slowdown in the rate of storage additions for the rest of October.”
Record Production vs Weather Uncertainty
NYMEX’s most-active November contract fell nearly 4% on Thursday after the US Energy Information Administration announced a weekly storage build of 81 billion cubic feet that came in slightly above the 5-year average of 79 bcf for this time of year.
But the price drop wasn’t enough to knock the market off the $3 per million metric British thermal units (mmBtu) perch it has been on since the week ending September 23. Myers added in his commentary:
“Despite today’s pull back, the prompt has repeatedly been drawn into the $3.30’s over the past couple of weeks and could be hinting a move up to $3.50/mmBtu is possible given the bullish factors at play.”
November natural gas settled on Thursday at $3.198 per mmBtu, after hitting a nine-month highs of $3.368 on Oct. 9.
On the technical front, natural gas also seems to be supported at above $3. Investing.com’s daily technical outlook has a “Buy” on November gas, with the strongest resistance only seen at $3.378.
Dominick Chirichella, analyst at the Energy Management Institute in New York, said he expected high volatility and intermittent price spikes in the second half of the winter if the actual temperatures proved to be in sync with forecasts.
“There are now only two variables left… how cold will the winter turn out and will the robust natgas production level be sufficient to offset the large inventory deficit,” Chirichella wrote in his own commentary after the close of Thursday’s market.
A Challenging Year For Both NatGas Analysts And Traders
Hitting the sweet spot on gas production, weather and pricing has been a challenge to both analysts and traders this year.
Reuters said there were 34 heating degree days (HDDs) last week, compared with 22 HDDs in the same week a year ago and a 30-year normal of 44 HDDs for the period.
HDDs measure the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 Celsius). The measure is used to estimate demand for heating homes and businesses.
London-based Energy Aspects said in a note on Wednesday that US temperatures below the 10-year normal would drive increases in peak heating demand and weather-aided gas power burn that would erode the cushion of supply. The group added:
“If we do assume a similar magnitude of supply disruptions in a cold event this year, with losses on the production side of around 2 bcf a day, that would take down the spare deliverability cushion to practically nil, suggesting a constrained market.”