After opening on Wednesday 28 cents lower than Tuesday’s settle, January natural gas quickly found support at $13.630 before exploring higher. Fluctuating weather reports and storage uncertainty allowed traders to push the prompt month to the day’s high of $14.400 before closing a few minutes later at $14.271, up 19.1 cents on the day.
While the futures market still has bullish momentum behind it, the weather should dictate the next directional trend. Moderating temperatures could hit a number of high gas-demand regions before the new year, but the National Weather Service’s (NWS) forecast appears to be changing.
In the latest six-to-10-day forecast, which covers Dec. 27-31, the line of colder-than-normal temperatures is inching farther north. The NWS expects below normal temperatures below an imaginary diagonal line from northern Pennsylvania to East Texas, but the vast majority of the country will see normal to above normal temperature readings.
Looking at the futures market, some industry insiders said it appeared that funds were the main driver higher on Wednesday. “I was told that the best buyers [Wednesday] were funds,” said Tom Saal of Commercial Brokerage Corp. in Miami. “They hit it hard early, but the locals pushed it down. However, the locals couldn’t get it under $13.630, which is prior support, and the market rallied pretty well as the funds came in and bought it up.”
He noted that the market appears to be keying off private weather forecasts. “The problem is these forecasts seem to be changing daily and this is a critical time of the year,” Saal said. “We are trading January, which has traditionally been the peak demand month in terms of weather-related space heating. The forecast is critical, and the market is continuously reacting. The problem here is that because we are at such high levels, the reactions are in the form of King Kong-like price moves.
“The latest I’m hearing is that it is expected to warm up in a number of areas into the weekend with cold returning next week,” Saal added. “That’s a little bit of a change from recent forecasts. These weather forecasts are a lot like musical chairs; eventually one of the forecasts is going to be right…and it is going to be the last one.”
In a briefing Wednesday, AccuWeather.com senior meteorologist John Kocet warned that cold could be back after a short break. “Mild weather will spread from the central states all the way to the eastern seaboard by Friday, and when a storm comes along this weekend, it will produce more rain than snow,” he said. “Next week, the odds don’t look good for the continuation of mild weather. I am putting my money on a return to harsh winter conditions throughout much of the East by Wednesday.”
As for the question of traders playing it safe as they try to square their books ahead of the year-end, Saal said he has not personally heard of that occurring. “People can take realized or unrealized gains or losses into the new year. It is accounting. I don’t have one client that is trading to flatten their book out before the year’s end.”
Looking at the rest of the week, Saal said it looks like the market wants to work a little higher here. “We had the initial breakout above $14.250, so I think we could find our way to some higher numbers,” he said.
IFR Energy Services’ Tim Evans said while the natural gas market may have had little in the way of definitive fresh fundamental news on Tuesday, the prompt month still managed an 80-cent range on the day with a full $8,000-per-contract peak-to-trough swing.
“These swings have thinned out the daily trading volume to some extent, but total open interest remains high, suggesting that for every trader cutting back on position size there is an offsetting newcomer willing to increase his risk,” Evans said. “The result is an immensely dangerous trading environment that puts a great premium on risk management skills. It won’t be surprising if we start seeing tales of big wins and big losses once companies are ready to report Q4 results.”
Focusing on Thursday morning’s natural gas storage report, Evans said he expects the Energy Information Administration (EIA) to report a withdrawal of 165-175 Bcf for the week ended Dec. 16. “While supportive compared with the 119 Bcf five-year average benchmark, the market may have the option of treating this as a bearish step down from the 202 Bcf withdrawal for the week ended Dec. 9,” he said. “After all, if a 202 Bcf draw couldn’t drive prices higher, why should a smaller 170 Bcf drop matter?”
Citigroup’s Kyle Cooper upped his withdrawal estimate earlier in the week to between 173 Bcf and 183 Bcf, citing robust physical pipeline flows. Golden, CO-based Bentek Energy said it projects a storage withdrawal of 164 Bcf for the week, resulting in 2,800 Bcf of gas in storage, which is 2.3% above the five-year average and 11.9% below the five-year high. A Reuters survey of 22 industry players found an average withdrawal estimation of 169 Bcf.
Wednesday afternoon’s ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, zeroed in on a 173 Bcf withdrawal. The market consensus starting point prior to the auction was a withdrawal of 160 Bcf.
According to the EIA, 114 Bcf was removed from stores last year for the same week. The agency will report storage at its normal 10:30 a.m. EST time slot Thursday morning.
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