Weather continues to be the driving force in the natural gas futures market as temperatures continue to fall. After gapping 20.1 cents higher to open at $11.540 Tuesday morning, December natural gas never penetrated beneath Monday's $11.331 settle. The prompt month traded within a range from $11.350 to $11.650, before settling at $11.614, up 28.3 cents for the day.
Traders now await Wednesday's natural gas storage report for the week ended Nov. 18, which could yield yet another injection. Adding to the noise on Wednesday, the last trading day of the week due to the Thanksgiving holiday, the American Petroleum Institute and Department of Energy petroleum stocks reports also will be released.
"Things were a little bit choppy Tuesday, but natural gas went out on a pretty strong note as we made new highs for the day on the close," said Nymex local Eric Bolling (known as RBI in the natural gas futures pit because of his stint with the Pittsburgh Pirates). "The only drawback was there was light volume on the day as traders began their vacations early. I would be getting a little bit bullish here if it wasn't for such light volume."
Bolling noted that the main focus right now is the recent cold burst through many of the key natural gas demand regions. "We had some snow flurries Tuesday morning in New York City and I think that probably got people a little bit nervous," he said. "We also have a long weekend following the EIA number Wednesday. If anything, we will probably see some short covering into Wednesday. My general gut feeling is higher from here. I think we could go up a bit."
Bolling noted that even though gas in storage is at a historically comfortable level, the market obviously isn't buying into the comfortableness of it because the price level has failed to come off substantially.
Some traders are looking favorably at the short side of the natural gas market. "It is going to take more than one cold wave to stem the downward [price] spiral" says Mike DeVooght, president DEVO Capital, a Colorado trading and consulting firm. He noted there is still a titanic struggle between the futures bulls and the physical bears. "We are looking at some of the widest differentials ever in the natural gas market [physical prices sharply under future Nymex prices]. It seems that the financial traders in the gas market have not thrown in the towel as we have seen in the [petroleum] complex." He added that from a trading standpoint they continue to hold current short positions.
Another analyst questioned how well cash and futures will be able to converge to close out the December contract since there is almost no spare storage capacity to help with arbitrage moves.
According to NGI's Daily Gas Price Index, gas for delivery to the Henry Hub on Nov. 22 was $10.44. December natural gas futures on Monday settled at $11.331, a whopping 89.1 cents over cash. The December natural gas contract expires Nov. 29 at which point holders of short futures contracts able to make delivery would receive a futures price which is currently far above that of the physical market.
An upcoming blast of cold air is expected to increase demand for natural gas and other heating fuels. The Weather Channel forecasts a high in Chicago of just 30 on Thanksgiving Day, 15 degrees below normal. However, the burst will be coming on a holiday weekend when offices are closed and demand is normally lower.
In addition to the petroleum inventory reports Wednesday, which could influence natural gas prices as well, OPEC may also be winding up to throw the markets a curve ball or two. The oil producers group holds its next meeting Dec. 12 in Kuwait and there is speculation that it may cut production. According to a Bloomberg report, Qatari Oil Minister Abdullah Hamad al-Attiyah said Monday that OPEC wishes to avoid a glut in the second quarter.
Looking at the natural gas storage situation, the natural gas storage report for the week ended Nov. 18 will be released Wednesday between 12:00 p.m. and 12:10 p.m. EST.
Citigroup's Kyle Cooper said he is looking for a build between 1 Bcf and 11 Bcf. "Prices are rebounding, as the weather forecasts remain supportive. The weather is obviously the key driver and will remain so at least through the end of the year," he said. "A build in our range would again be considered bearish on a temperature-adjusted basis, more so when seasonal factors are considered."
According to a Reuters survey of 19 industry players, the range of estimated weekly storage changes runs from a 30 Bcf build to a 17 Bcf withdrawal, with the averaged estimate calling for an 8 Bcf injection. Tuesday afternoon's ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, predicted a 5 Bcf injection for the week.
Any injection for the week would be bearish when compared to historical analogs. The same week last year produced a 15 Bcf withdrawal, while the five-year average for the week is a withdrawal of 23 Bcf.
Surrounding the Thanksgiving holiday, Nymex has altered its trading schedule. In addition to no trading on Thursday and Friday, the exchange reported that there will be no electronic trading Wednesday after the regular energy trading session. On Sunday, electronic trading will resume at 7 p.m. EST.
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