March natural gas is set to open 2 cents higher Tuesday morning at $1.84 even though traders see fundamentals suggesting lower prices and little support from near-term weather. Overnight oil markets fell.
Analysts see both supply and demand factors failing to offer any suggestion of higher prices and speculative traders ready to strike. "At the end of the day, forces of both the supply and demand variety appear deserving of bearish check marks through the balance of this HDD cycle, with supplies beginning the injection period by early April at an unusually high level with the exception of three years ago," said Jim Ritterbusch of Ritterbusch and Associates in a report to clients.
"As a result, this market would appear set up for a weak pricing environment across the shoulder period until the CDD factor begins to come into play. As a result, we see physical values spending much time south of the $2 mark, and we are not ruling out an eventual drop in Henry Hub pricing into the $1,60s sometime next month depending upon temperature updates.
"In view of these expectations, we see contango expansion ahead, with weak spot pricing weighing on nearby contracts with some expected price-induced production decline driving support into the summer-fall months that will also be demanding premium to account for weather uncertainties related to both temperatures and hurricanes. And as carrying charges stretch, the large speculative entities will find reason to gravitate further into the short side of the market as current favorable roll yields become even more attractive. We were surprised by the sizable decline in net short holdings during the latest COT reporting period, and we see plenty of latitude for renewed entry into various bearish strategies by the speculative community."
Weather model runs changed little overnight, and forecasters are expecting risks to the warmer side, according to Commodity Weather Group in its Tuesday morning report. "While all models came in warmer overnight than their prior runs (and generally warmer than yesterday morning), there are still fairly big differences between the American and European for the six-10 day window, with the European ensemble now much warmer from coast to coast and the American still threatening some colder weather around the Great Lakes with only a near-normal East and South.
"Strangely, despite bigger disparity on the six-10 day, the three ensemble options (Euro, American, Canadian) are fairly similar in the 11-15 day with a slightly cooler Midwest (seasonal/below) and near-normal East and South. Based on external factors that favor stronger El Nino atmospheric response (very negative Southern Oscillation Index and positive global wind), we continue to believe that warmer risks are still stronger than colder ones overall. Any colder threats would likely be shorter-lived too," said Matt Rogers, president of the firm.
Near-term data from the National Weather Service (NWS) show an expected warming trend as well. In its forecast for the week ending Feb. 27, NWS shows below-normal heating requirements for major metropolitan areas. New England is expected to see 196 heating degree days (HDD), or 54 below normal, and the Mid-Atlantic should have 193 HDD, or 38 below its normal tally. The greater Midwest from Ohio to Wisconsin is anticipated to have 226 HDD, or 19 below normal.
In overnight Globex trading April crude oil fell 37 cents to $33.02/bbl and April RBOB gasoline lost a cent to $1.2448/gal.