Weather Blows Cold and Futures Respond, But Resistance Caps Rally
With focus shifted away from last week's diminutive storage withdrawal (80 Bcf) and onto forecasts for the coldest air thus far this winter, the natural gas futures market erupted higher Monday as sellers backed away from a steady stream of commercial short-covering and speculative buying. The February contract received the biggest boost in the market's first trading session of the year, rallying 63.8 to close at $6.827. At 48,897 contracts, volume was extremely light for the session.
According to the latest short- and medium-range outlooks from the National Weather Service, below normal temperatures are in store for the eastern half of the country through at least Jan. 19. As of press time last night the mercury levels were dropping rapidly, with lake-effect snow from the Great Lakes invading New York, Ohio, Pennsylvania and West Virginia. By Wednesday and Thursday, the weather will be downright frigid, with nighttime temperatures in most northeastern population centers dropping to the single digits. It will be even colder in northern New England, where lows of 15-20 degrees below zero are expected Wednesday night.
The 10% price rise Monday came on the heels of a 6% price slide last Wednesday amid an undeniably unsupportive storage report. According to the Energy Information Administration, 80 Bcf was pulled from underground storage facilities, dropping inventories to 2,619 Bcf as of Dec. 26. Following a string of larger-than-expected storage draws, the small number was a surprise to virtually all market participants. Not only did the takeaway fall short of the 123 Bcf and 161 Bcf figures registered last year and for the five-year average respectively, but it ducked well beneath the range of market expectations calling for a 101-140 Bcf pull.
Looking back at the report, market-watchers are trying to decipher whether it was a fluke, or indicative of a fundamental change in the supply-demand balance. "A couple of reasons could be responsible for the low withdrawal," speculated Citigroup analyst Kyle Cooper in a note to clients last Wednesday. "[One effect], which we did not believe would become apparent until January, would the fuel switching. As mentioned [Tuesday], natural gas is considered extremely overvalued in relation to crude and this could have also played a role in this low draw." Another factor, that would signify a shift rather than a fluke, is the idea of outright demand loss, he continued.
However, it is possible that the smallish storage withdrawal is a result of plant shutdowns over the December holidays, rather than some larger macro-economic factor. "After a non-existent industrial 'Thanksgiving Effect,' I had reduced, but not eliminated, a Christmas holiday effect," Cooper reflected. "With a Thursday Christmas and many plants and office building also closed Friday, this was probably the major cause of the lower demand."
Looking ahead, early estimates for this week's storage report are centered on a 70-80 Bcf pull, which if realized would fall short of the draw last year of 86 Bcf and the five-year average pull of 148 Bcf.
While gaining some serious yardage Monday, the February contract failed to put any points on the board from a technical standpoint. With last Tuesday's $6.95 high safely intact above Monday's $6.92 spike, the market appears to be consolidating within its recent $5.94-$6.95 trading range. Also marring bulls' run Monday was the level of activity in the gas pit. With just 48,897 contracts changing hands Monday, the session's gains were more a function of a lack of selling rather than of a strong bullish leadership.