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Spot Futures Record Largest Single-Day Drop in Five-and-a-Half Years

Physical natural gas values for Tuesday delivery saw mixed results Monday as declines dominated the Gulf Coast, Midcontinent, Rockies and the West, while the Midwest, East and Northeast saw their fair share of gains and losses. The real action on the day was occurring in the futures arena, where whiplash-inducing volatility continued its recent run. The March contract plunged 69 cents to $5.445 and the April contract shed 39.2 cents to $4.620. April crude oil added 62 cents to $102.82/bbl.

Two days before the contract's Wednesday expiration, the March natgas futures drop qualified as the largest single-day price decline in five-and-a-half years. Analysts and traders were hard pressed to find an easy explanation and most cited the Wednesday expiration of the March contract as a desire to book gains ahead of what can be volatile expiration-day trading. Others pointed to reworked weather models showing near-term milder temperatures. For the most part, traders were caught off-guard once prices started sliding following a strong open.

Monday's "sell-off marks the largest single session decline since Sept. 2, 2008 when the front contract shed 68.2 cents," said BNP Paribas analyst Teri Viswanath. "It is challenging to pinpoint what hastened the aggressive reversal. Quite possibly, the collapse might have been an exaggerated response to the slightly milder midday weather model run."

She noted that this would not be the first time that the market overreacted to a slight warm-up in the weather forecasts this season. "At the end of January, an inaccurate model run led to premature calls for the 'end of winter,' triggering a similar correction in the March '14 contract that ultimately proved short-lived. With stocks currently at the lowest level since 2004 and more cold weather ahead, today's sell-off might prove similarly fleeting as consumers scramble to line-up reliable supplies for next month."

A change in the weather models was not a universally held opinion. "The latest GFS [Global Forecast System] doesn't change any of our ideas," said Joe Bastardi, WeatherBELL meteorologist in a Monday afternoon update. "More importantly, the ECMWF MJO [European model and Madden Julian Oscillation] forecast is taking the MJO toward the colder March phases."

"Starting this weekend, the storm track is cranking on the GFS and a lot of snow and ice is going to fall in the 10-day period starting Friday from west to east (mainly between Interstate 40 and Interstate 80). This blanket of snow will be a natural magnet for cold."

"The market is showing 100% implied volatility, and we haven't seen that in a while," said Tom Saal, vice president at INTL FC Stone in Miami. Typically when volatility increases, options premium skyrockets thus setting up possible strategies involving the sale of option premium. "I wouldn't sell calls just yet. I don't know if we are done to the upside," he said.

Saal noted, though, that it was a "textbook reversal day. It made a new high for the move [$6.493] and settled below four previous closes. My caution is that the volatility is so high that it [this move] could be negated in one day."

"If you get the same pattern on a weekly chart, then you get confirmation of a market top."

While Monday's decline set a record, it's important to note that the drop did little more than wipe out Friday's significant spike. After closing at $5.551 last Thursday, March futures spiked to a $6.149 close on Friday, before falling to $5.445 on Monday, down only 10.6 cents from Thursday's finish.

Multiple polar vortices have resulted in record natural gas storage withdrawals this winter, reintroducing price volatility to a market that has been calmed in recent years by mild winters and plentiful shale gas. The industry appears not so sure that weather tells the full story.

The American Public Gas Association (APGA) has asked the Commodity Futures Trading Commission (CFTC) to look into a 10% price spike in the February Nymex Henry Hub contract during the final hours of trading on Jan. 29 (see related story). The 52.4-cent jump for natural gas for February delivery that drove the Nymex price to $5.557/MMBtu -- the highest closing price at the time since Jan. 25, 2010 -- was the largest one-day percentage gain since June 14, 2012, APGA said in a letter sent to CFTC Acting Chair Mark Wetjen.

"APGA believes it is important that the CFTC review the trading activities to ensure that natural market forces, and not excessive speculation or other market abuses, were the causes for the 10% price spike in the February 2014 Nymex Henry Hub contract that occurred in the final hours of trading. While the weather may have been particularly cold at that time, APGA questions whether cold weather can fully account for the 10% price spike," the organization said in its letter.

Turning attention to the physical gas market, some significant gains were logged in the East, Northeast and Midwest as traders hustled to line up supplies ahead of the next major series of storms. Forecasters are calling for a return of winter conditions into early March.

"As cold air becomes re-established over the northern half of the nation, multiple storms will continue to move along with rounds of disruptive wintry precipitation," said Alex Sosnowski, AccuWeathwer.com meteorologist.

"One pathway will allow storms to cruise along the Deep South with rounds of showers and thunderstorms, [and] over the next couple of weeks, multiple storm tracks will keep the weather pattern rather busy. Clipper storms will also be running about. These moisture-lean storms will drop in from the Canada Prairies and will sweep across the Midwest and Northeast, spreading light, spotty snow.

"Stronger storms from the Pacific Ocean will also move eastward across the country, beginning early next week. The stronger storms from the Pacific will bring much-needed rainfall and mountain snow to California and neighboring states. The storms affecting the eastern two-thirds of the nation during this week are forecast to be on the weaker side of the spectrum.

"However, they can bring a few rounds of light to moderate snowfall and a wintry mix in the Northern states. These rounds of snow can be enough to cause delays and disruptions to daily activities and travel," Sosnowski said.

In their early phases, the storms are expected to have the most impact in the Midwest. AccuWeather.com forecasts the high Thursday in Chicago will be a bone-chilling 9 degrees, and in Cleveland the high will hit only 13. New York City's high on Thursday, however, is expected to be 32.

Gas for Tuesday delivery at the Algonquin Citygates rose $8.16 to $29.78, and packages at Iroquois Waddington gained $5.18 to $26.71. Gas on Tennessee Zone 6 200 L added a plump $7.34 to $29.26. On Tetco M-3 Delivery, next-day packages were seen at $7.63, up 97 cents, and gas bound for New York City on Transco Zone 6 rose by $2.91 to $10.40.

However, not all eastern points were in the black Monday. Transco-Leidy Line dropped 64 cents to average $4.06 and Tennesse Zone 4 Marcellus dropped 81 cents to average $3.07.

Prices firmed at key Midwestern points. Gas on Alliance rose by 69 cents to $28.26, and Chicago Citygate prices rose $1.83 to $19.41. On Consumers, gas for Tuesday gained 71 cents to $28.98 and deliveries to Michcon gained 20 cents to $27.44.

In a Monday morning market assessment, WeatherBELL Analytics' Alan Lammey said "the weather forecasts are now predicting even higher levels of confidence of a return to much colder than normal temperatures starting this week. There is also growing confidence that the month of March may also be a colder month as well. While the March contract increased by nearly 18%, or 92 cents, recently, which is remarkable in itself, it could see a potential 'blow off top' prior to its expiry this week.

Amen.

"As bitter cold returns to the north-central U.S., Midwest demand is showing plus-2.8 Bcf/ to 15.2 Bcf/d from last Wednesday's 12.37 Bcf/d [and] due to cold weather rolling down the East Coast, Southeast demand has increased plus-1.0 Bcf/d to 11.8 Bcf/d from last Thursday's 10.8 Bcf/d," said Genscape Inc. analysts Monday.

Saal, in his work with Market Profile, was looking for the market [March contract] to test last week's value area at $6.241 to $5.965 and "then test $5.110 to $4.594 if time permits." He also cited a 2008 value area at $6.886 as a "long-term target."

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