January natural gas futures settled lower for a sixth consecutive regular session on Tuesday as isolated near-term cold would appear to be no match for warmer-than-normal winter temperature forecasts, more than comfortable natural gas storage levels and significant weakness in neighboring crude futures. January natural gas reached a low of $7.080 before closing Tuesday at $7.155, down 5.9 cents from Monday.
“We are witnessing a slow grind lower here in the market. Support at $7 — which is trying to hold up here — is much more than just psychological support,” said a Washington, DC-based broker. “Looking at the recently vacated $7.750 to $8.500 trading range, we had been expecting about a 75-cent drop if we were able to get below $7.750. We’ve gotten down there and flirted with it a couple of times, but we haven’t been able to get below and settle yet.”
He noted that nothing really is changing on the weather picture. “The forecasters are still calling for cold into mid-December, but it will be followed by an extended warm-up in most regions. We’ll have to see if that forecast materializes. We are currently getting some cold weather here, but I don’t think it is all that much below average.”
Addressing the Energy Information Administration’s natural gas storage report for the week ended Nov. 30, the broker said he is expecting a withdrawal of 55-65 Bcf to be revealed on Thursday morning. “While the draw could be slightly bigger than the 60 Bcf five-year average pull, I don’t know whether that is enough of a difference to shake things up. Now if we saw a 48 Bcf draw, then the bears would likely hit the downside again.”
With weather and storage activity likely within expectations in the near term, the broker said one of the only potential natural gas market movers right now is crude futures. On Tuesday January crude dropped 99 cents to close at $88.32/bbl.
“We believe there is a chance of seeing crude with a mid- to upper-$70s/bbl handle here in the near future. So if there is still another $10 to go to the downside in crude, it might be pretty hard for natural gas futures to ignore. There is a bearish tinge to all of the energies and I would not expect natural gas to be immune to it. Below $7/MMBtu, our next significant support area for January natural gas comes in at $6.470.”
With the uncertainty of the winter heating season normally capable of maintaining at least a steady pricing environment, top analysts are weighing in on a softer winter pricing scenario. “Although storage will still post seasonal draws, a year-end supply of at least 2.9 Tcf appears virtually assured. Such a level would compare with a five-year average storage of around 2.7 Tcf,” points out Jim Ritterbusch of Ritterbusch and Associates.
There may even be 3 Tcf in storage by the end of December. Current supplies stand at 3,528 Bcf, and assuming a seasonal draw of 60 Bcf in this week’s report, December should begin with about 3,468 Bcf. For the four weeks of December a hefty 117 Bcf would have to be withdrawn each week to drop supplies to 3 Tcf.
“This implied surplus should provide for a sizable cushion capable of absorbing even exceptionally strong requirements during the January-February period,” Ritterbusch said in a note to clients. “Within this seemingly bearish pricing environment it will be difficult for the natural gas market to disassociate itself from any additional sharp declines in oil prices.”
Ending December with less than 3 Tcf in storage may still be in the cards. Meteorologist John Dee in his most recent 11- to 16-day forecast sees a pattern supporting “below-average temps across the northern two-thirds of the U.S. with average to above-average temps seen in the far South.” He suggested the northern tier cold “may not be record-breaking but would still be enough to support high demands for heating.”
Short-term traders see some near-term price recovery offsetting recent weakness. “I look for short-covering to take prices higher in the next couple of days to about $7.450,” said a New York floor trader. He added that he didn’t see January trading $8, and $7.500 to $7.600 would be the upside, with prices as low as $6.750 on the downside.
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