February natural gas is set to open 4 cents higher Tuesday morning at $4.37 as traders assess oncoming cold in pivotal eastern markets and factor in a greater cold event than earlier expected. Overnight oil markets rose.
Over the extended weekend, near-term weather forecasts turned colder. Expected cold is seen as more intense than earlier. "A significant snow burst for the East Coast [Tuesday] works to enhance cold effects over the next number of days, assisting with colder changes in the short term," said Matt Rogers, president of Commodity Weather Group, in the firm's Tuesday morning six- to 10-day outlook. "The PJM region could see average temperatures rivaling the severe Jan. 7th event tomorrow, although wind chills should not be as intense. Also, the next surge of Arctic air early next week is looking stronger on the latest modeling.
"The result is likely demand gains from the Friday outlook for the Midwest, East, and even South where cold is getting more strongly even into Texas than forecast back on Friday. Beyond the 10-day window, the models are more divided, with the American staying colder and the European warming up as the pattern shifts a bit. However, it seems like it could be a reloading situation with colder risks after the first week of February."
The National Weather Service in its forecast of heating requirements is looking for near-term usage to be well above normal. For the week ended Jan. 25 New England is expected to shiver under 308 heating degree days (HDD), or 24 more than normal, and the Mid-Atlantic is forecast to endure 297 HDD, or 33 above its seasonal norm. The greater Midwest from Ohio to Wisconsin is forecast to see 341 HDD, or 45 more than normal.
Analysts are undeterred in their outlook that the market is well supplied and not likely to stage a significant rally any time soon. Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management, firm saw last week's advance capped by what he sees as "technical and hedge selling at the $4.50 level," and sees near-term market strength as selling opportunities. "On a trading basis, we will continue to use rallies approaching the mid-$4.00 level as a selling opportunity for the winter contracts, [and] $4.20-4.30 in next summer's strip. Cold weather could support the markets, but more than adequate supply and flat demand will put a cap on gas prices for the foreseeable future."
He counsels trading accounts to hold short February $4.50 calls at 20 cents and to also stay short March futures at $4.40 to $4.50. End-users should stand aside, and those with exposure to lower prices should hold short the remainder of a November-March strip at $4.50 to $4.60 and stay short the April-October strip at $4.20 to $4.30.
Industry consultant Genscape reports that pipelines are already gearing up for the expected cold. In its morning report it said "Southeast Mid-Atlantic demand has decreased 6.67 Bcf/d from last week's average of 13.97 Bcf/d to B.21 Bcf/d. However, due to an anticipated drop in temperature, SONAT has issued OFOs for multiple groups over the next several days."
In addition, "Appalachia demand has increased 1.38 Bcf/d from last week's average of 14.34 Bcf/d to 15.71 Bcf/d due to colder than normal temperatures. Transco is issuing a system-wide OFO with a minimum $50/Dth penalty. TGP, Empire, Nat Fuel and Col Gas all have released notices that flow will be effected by cold weather."
Tom Saal, vice president at INTL FC Stone in Miami, in his work with Market Profile see "weakness in the spot contract" but "The back years, Cal' 15, Cal' 17 and Cal' 19 are showing some strength. Only people who trade the futures market can influence its outcome, all other people are just spectators."
In overnight Globex trading, February crude oil rose 22 cents to $94.59/bbl and February RBOB gasoline added close to 4 cents to $2.6588/gal.