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Revised Demand Forecast Puts Market in Peril, Analyst Says; March Seen Flat

March natural gas is set to open unchanged Wednesday morning at $1.78 as forecasts call for a significant reduction in heating requirements going into March. Overnight oil markets fell.

Tuesday's forecast knocked the spots off demand forecasts going into March. "The end of winter is in sight with less than a week remaining in February, and the March Nymex Henry Hub contract is approaching expiration," said EnergyGPS, a Portland, OR-based power and gas consulting firm in a morning note to clients. "Since early last week, the March contract has steadily declined as warm weather proliferated across the country. In light of recent HDD [heating degree day] forecasts for early March, we believe the decline in the gas market is likely to continue.

"On the morning of the 22nd, the outlook for the first week in March was relatively strong compared with what we have seen thus far this winter as HDDs in the East were expected to be well above average. The strength in the East drove the total continental U.S. HDD expectations above normal for the six-10 day period. While the overall outlook for the 15-day period was still below normal, thanks to a bearish one- to five-day period and widespread heat in the West, the strength in the six-10 and near-normal temperatures in the 11- to 15-day period was a welcome sight to any sellers in the market that have been tormented by the warm winter. 

"[T]he East [was] the only region with consistently above-normal residential/commercial demand expectations. However, on the morning of the 23rd we were looking at a significantly different landscape as the HDDs were stripped out of the East for the six-10 day period. Between the 22nd and the 23rd, 15.8 HDDs were taken from the six-10 day, with 11.2 coming from the East region alone. As would be expected,  the residential/commercial natural gas demand forecasts followed the HDD forecast down.

"The outlook is significantly more bearish using the 2/23 HDD forecasts to estimate residential/commercial demand over the next 15 days. Total continental U.S. residential/commercial demand in now forecasted to be 7 Bcf below normal through the first eight days in March. This is a major blow to any sellers in the market hoping for near-normal demand in March.  The market reacted to the bearish revision with Nymex hub trading down about 3 cents to $1.78 for the March contract. If the 2/23 HDD forecast holds moving forward, we see significant downside risk in the market. With storage levels remaining at five-year highs, we may see the prompt month prices continue to march downward until a strong signal is sent to producers to reduce production due to lack of demand."

Tom Saal, vice president at FCStone Latin America LLC in Miami, expects the market to test Tuesday's value area at $1.806 to $1.778. From a trading standpoint, he says to go with the weekly breakout parameters, the weekly initial balance, should prices break above $1.847 or below $1.778. "Maybe" the market will test a second value area at $1.908 to $1.874, he said in a morning note to clients.

In overnight Globex trading April crude oil fell 91 cents to $30.96/bbl and April RBOB gasoline fell fractionally to $1.2181/gal.

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