Natural gas futures traders on Thursday found themselves caught between opposing fundamentals as a bearish 115 Bcf storage draw report collided with expectations of a wave of lasting wintry cold Friday that was expected to bring heavy snowfalls from Omaha, NE, to Chicago, to Washington, DC, to New York City. The March contract ended up closing the day’s regular session at $5.416, three-tenths of a penny below Wednesday’s finish.
After natural gas futures inched lower in Thursday morning trading the slide was accelerated following news from the Energy Information Administration (EIA) of a smaller than expected 115 Bcf storage draw for the week ending Jan. 29. Prior to the 10:30 a.m. EST report, the March contract was trading at $5.366. In the minutes that immediately followed, the prompt-month contract declined further, reaching a low of $5.227 just after 11:30 a.m. EST. From there futures rebounded.
“I think traders were a little bit conflicted Thursday with the storage report in one hand and the weather forecasts in the other,” said Steve Blair, a broker with Rafferty Technical Research in New York. “We’ve got a lot of below-normal weather forecasts going forward, so we might find ourselves in another really cold stretch. That said, the year-on-year storage surplus just got healthier with Thursday’s report. We’ll have to see if the cold does show up for an extended period and whether we get some significant storage withdrawals over the next few weeks. There is still time to do damage.”
Blair added that the futures market appears really comfortable right in the middle of the nearly two-month long trading range from $5.060 to $6.108. “The market seems to be caught in this recent range,” he told NGI. “No matter whether it goes up a bit, or down a bit, it always seems to be coming back to this $5.500 level.”
Noting that most industry withdrawal estimates were for at least 120 Bcf, Citi Futures Perspective analyst Tim Evans called the draw “bearish,” but warned that the effect might be short-lived with the cold surge settling in Friday.
“The DOE reported a 115 Bcf net withdrawal from U.S. storage for last week, in the low end of the range of expectations and quite bearish compared with the 177 Bcf five-year average mark,” Evans said. “Following the very low 86 Bcf net withdrawal from the prior week this is beginning to suggest that production has picked up. The reaction to the data will be an important test for the market in terms of how much damage is done to the price and whether new highs will be attainable off the cold snap forecast for next week.”
Heading into the report, industry expectations were for a larger withdrawal than the previous week’s 86 Bcf pull, but much smaller than the two 200 Bcf-plus pulls recorded for the weeks ending Jan. 8 and Jan. 15. Bentek Energy was projecting a withdrawal of 122 Bcf, while Evans was calling for a 135 Bcf draw. The actual 115 Bcf draw fell well short of last year’s date-adjusted 194 Bcf pull.
As of Jan. 29, working gas in storage stood at 2,406 Bcf, according to EIA estimates. Stocks are now 199 Bcf higher than last year at this time and 150 Bcf above the five-year average of 2,256 Bcf. For the week, the East Region withdrew 83 Bcf, while the West and Producing regions pulled out 21 Bcf and 11 Bcf, respectively.
Natural gas bulls looking for a weather-driven advance capable of taking futures back over $6 may have to be patient because although recent forecasts call for a return of arctic air not unlike the incursion of early January, expected heating requirements suggest little more than seasonal withdrawals for next week.
The National Weather Service predicted that for the week ending Feb. 6 heating requirements in major energy markets would be slightly below normal. New England was expected to see 267 heating degree days (HDD), or five fewer than normal, and New York, New Jersey and Pennsylvania were forecast to endure 259 HDD, their seasonal norm. The Midwest from Ohio to Wisconsin should experience 270 HDD, or 17 fewer than average.
Some top traders recognize that storage data can easily be trumped by a change in the weather outlook, but they also seek pricing clues from the spread curve. Should March futures go into contango, it could send a bearish signal. “Next-day cash pricing has been moving closely in tandem with the nearby screen this week and will likely be supported next week by the below-normal temps,” said Jim Ritterbusch of Ritterbusch and Associates. He added that under circumstances such as those “a possible shift in the March-April switch [spread] to a contango would send off a strong bearish portent of an eventual decline back toward the $5.00 area.”
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