April natural gas is expected to open a penny higher Friday morning at $2.71 as traders deal with ongoing, load-building cold and expectations for a sharp reduction in season ending inventories. Overnight oil markets rose.
The colder-than-normal weather outlook changed little overnight. MDA Weather Services said, "Changes were relatively minor in this [six- to 10-day] period as the cold pattern of late continues through the first week of March. This cold continues to be driven by the strong northern and eastern Pacific ridge and the displaced polar vortex, and much below normal readings will remain widespread from the central Rockies to the Northeast.
"The strongest cold is seen early in the central U.S., and the arctic air mass supporting this cold presses eastward into the mid-period. Only the South features 'aboves' early on before turning colder thereafter. The West is also cold but moderating in the second half."
In spite of the sub-par 219 Bcf storage withdrawal seen in Thursday's EIA inventory report, analysts sense a shift in the supply-demand balance such that burdensome injection season supplies are off the table.
"Late-breaking winter weather is draining natural gas inventories at a pace comparable to last year, with a significant deficit to the five-year average likely to emerge by the end of March," said Teri Viswanath, director of natural gas trading strategy at BNP Paribas. "To be sure, we now see end-of-season inventories falling to just 1.48 Tcf compared to the 1.7 Tcf predicted last month or a 175 Bcf deficit to the five-year average.
"Such an unanticipated reduction in inventories might naturally be expected to spur a recovery in prices. However, with the end of winter and looser balances around the corner, the market appears preoccupied with domestic production growth and the prospect of a 'summer of oversupply.' We disagree. With more room to accommodate surplus supplies this summer, concerns that the industry will test physical storage limits is misguided. Further, the pace of refilling the more significantly drained storage facilities might actually disappoint."
Viswanath recommends holding on to a long January 2016 futures position established Feb. 6.
In overnight Globex trading April crude oil gained 98 cents to $49.15/bbl and April RBOB gasoline rose 4 cents to $1.9385/gal.