Next-day gas prices surged higher in Monday's trading ahead of the first blast of the polar vortex, which by the middle of the week was to hit major Midwest population centers, with temperatures as much as 20 degrees below normal.
Only a handful of locations throughout the country are expected to escape the first major cold incursion and nearly all market points with the exception of New England posted solid double-digit gains. California points surged higher as West Coast locations played catch-up with other market points. Overall, the market added 30 cents.
Futures prices went the other way, with traders suggesting that a near term high is in. At the close, December had lost 15.7 cents to $4.255 and January was down 15.6 cents to $4.351. December crude oil resumed its losing ways dropping $1.25 to $77.40/bbl.
Few spots are expected to escape Mother Nature's early winter wrath.
"As the polar vortex gets displaced to the south, the door will open for arctic air to plunge over the most of the United States as the new week progresses," said AccuWeather.com meteorologist Kristina Pydnowski."Only the Southwest, Hawaii, Alaska and South Florida will escape the grip of the upcoming arctic blast that the polar vortex can be blamed for."
Next-day gas at Midwest and Great Lakes locations jumped. Deliveries to Alliance rose 40 cents to $4.43 and gas at the Chicago Citygates added 34 cents to $4.41. At Demarcation, Tuesday packages came in at $4.49, up 51 cents and on Consumers gas was quoted at $4.40, up 31 cents. Deliveries to Michcon gained 33 cents to $4.43.
Temperatures throughout the area were expected sharply lower. AccuWeather.com predicted Monday's high of 30 in Minneapolis would slide to 28 Tuesday and 25 by Wednesday. The normal high in Minneapolis is 45. Milwaukee's 53 high Monday was seen falling to 45 Tuesday and 32 by Wednesday. The normal mid-November high in Milwaukee is 49. Chicago's "balmy" 59 Monday was predicted to drop to 49 Tuesday and 32 by Wednesday. The seasonal high is 52.
New England locations came in mostly lower as power prices fell. At the Algonquin Citygates, Tuesday gas shed $1.18 to $4.97 and parcels at Iroquois Waddington added 16 cents to $4.66. Gas on Tennessee Zone 6 200 L fell 84 cents to $4.84.
Next-day peak power prices offered New England gas buyers little incentive to purchase incremental volumes. IntercontinentalExchange reported that peak next-day power at the ISO New England's Massachusetts Hub fell $10.40 to $49.76/MWh, and peak power at the PJM West terminal for Tuesday fell $5.61 to $38.97/MWh.
At locations seemingly out of the path of the forecast, next-day gas prices also rocketed higher. West Coast next-day prices came in higher by double digits as the market played catch up.
"Places like SoCal Citygates were suppressed for a little bit, but the West Coast now has to compete for gas with other parts of the country," said a San Diego buyer for an independent power producer. "On a one to two day move the price change looks big, but on a seven or eight day period it's not so much. Our margins last week were much better."
At Malin, Tuesday gas changed hands at $4.26, up 55 cents, and at the PG&E Citygates. Tuesday volumes came in at $4.75, up 11 cents. SoCal Citygate gas was quoted at $4.54, up 49 cents, and at the SoCal Border next-day gas was seen at $4.38, up 51 cents. On El Paso S Mainline, next-day gas changed hands at $4.38, up 48 cents.
Mid-Atlantic points were also strong. Gas on its way to New York City on Transco Zone 6 added 16 cents to $3.56, and on Tetco M-3 packages rose by 20 cents to $3.58. Gas on Millennium was up 32 cents to $3.43, and deliveries to Transco Leidy added a hefty 61 cents to $3.39. Deliveries on Tennessee Zone 4 Marcellus gained 57 cents to $3.31.
Futures traders pointed to an ominous technical feature of Monday's trading in that the low on the December contract of $4.246 was lower than Friday's low of $4.282. This suggested near term high prices may be in, some said.
WSI Corp. in its Monday morning 11-15 day outlook said the period has "trended significantly colder across the interior Northwest in through the eastern two-thirds when compared to Friday's forecast. Forecast confidence is considered average at best as models show reasonably good agreement but uncertainty increases late in the period.
"The forecast could trend cooler over the Northwest and warmer over the Plains/Midwest if the highly amplified pattern relaxes and the Pacific jet stream takes on a larger role than what is currently forecast." WSI forecast that Chicago's Monday high of 60 and low of 41 would plunge by next Monday to a high of 29 and low of 18. The normal readings in Chicago this time of year are for a high of 49 and low of 33.
Risk managers are taking the current advance more or less in stride.
"We have been looking for a rally prior to the kickoff of the heat season. But the past week definitely exceeded even our bullish expectations," said DEVO Capital President Mike DeVooght. "We feel a big part of this week's rally was driven by short-covering by the funds, which have been covering huge short positions in natural gas. The forward markets have risen considerately more than the spot market over the past week.
"Last year the rally was driven by the cash market because of extremely cold weather driving up demand. Even though we still feel we can see higher prices in the weeks to come, we would be cautious and suspect of the current rally. Unless the cash market (and physical demand driven by cold weather) start to show some relative strength, we could give back half of the recent rally very fast.
"On a trade basis, we will book profits on our short puts (half of our long collar trade) and hold our calls. We will look at selling the puts again if we break back to the $4.00 level. For producers, we are still look at establishing short hedges if we get in the mid $4.00 level on the forward six and 12-month strip. We are in no rush to sell the balance of the winter strip at this time. If considering just locking in the winter, we would do so in the $4.70-4.90 range."
Friday, the winter strip settled at $4.432.
Following last Thursday's inventory report, BNP Paribas' Teri Viswanath, director of natural gas trading strategy, put some historical perspective on the recent advance. "In a little more than a week, the December '14 contract has gained more than [$0.77], or trading from $3.637 to [$4.41]/MMBtu. This impressive recovery represents the largest move in gas prices in the first half of November since 2000.
"Interestingly enough, a similar cold pattern was responsible for that earlier rally more than a decade ago," she said. "According to MDA Weather Services, the period of Nov. 1-20 will likely rank as the 11th coldest since the 1950s, or closely aligned to 2000 which ranked as the eighth coldest. Last November was actually warmer by comparison, ranking 35th in the last 64 years.
"The massive institutional deleveraging that has taken place over the course of the injection season has opened the door to accumulation ahead of the winter. Now the prospect of strong heating demand ahead has given bargain-minded investors an excuse to rush back into the U.S. natural gas market. Accordingly, if we had to weigh in on whether the current sell-off is a reality check or a short-term buying opportunity, we would opt for the latter. In the absence of a string of re-affirming stock reports that ease winter supply concerns, winter risk appears to be back on," she said.
The January 2001 contract went on to reach a peak of $10.100 on Dec. 27.
"For this current outbreak, the harshest cold in relation to normal will encompass the northern Rockies and Plains," said meteorologist Pydynowski. "However, temperatures will also plummet throughout the Northwest and to the Gulf Coast and I-95 corridor. The arctic blast [was to] drop into the northern Rockies on Monday, accompanied by a snowstorm on its leading edge. The frigid air following the storm will cause a freeze-up and icy travel."