After opening 62.1 cents lower than Wednesday’s settle, January natural gas futures prices collapsed $1.348 on Thursday to end the day at $12.923, leaving many market experts dumbfounded. The Energy Information Administration (EIA) reported a lower than expected 162 Bcf storage withdrawal, but it was still a big storage drop by historical standards.
Nevertheless, by 10.38 a.m. EST the January contract was trading at $13.430, down 84.1 cents from Wednesday’s settle. It continued downhill from there.
“I think everyone in this industry knows these prices are too high,” said futures broker Tom Saal. “I think most people would say that sooner or later she is going to come down.” All it took was a warmer weather forecast and a slightly bearish storage report to trigger the move.
“The 11- to 15-day forecast warmed up some and we had an EIA report at the lower end of expectations,” said Citigroup’s Kyle Cooper. “You also have to still keep in mind that we’re at a price that, prior to the hurricanes, had never been witnessed before. Even though we are off $1.348 today, we are still at a level that never had been seen prior to the last few months.
“So historically we are still very high and inventories are actually still above the three- and the five-year averages,” he noted. “We’ve got high inventories, still-record prices and warmer temperatures on the way.”
The National Weather Service predicts above-normal temperatures for the bulk of the nation starting next week and into January. Market observers see the potential for some smaller storage withdrawals over the next few weeks, leaving working gas in a relatively healthy position into January while prices are still much higher than historical levels.
The EIA reported Thursday that there was 2,802 Bcf of working gas in storage on Dec. 16, or about 243 Bcf less working gas than at the same time last year but 64 Bcf more than the five-year average. The 162 Bcf withdrawal came in 10-20 Bcf lower than most predictions. For example, the ICAP-Nymex storage options auction settled at 173 Bcf on Wednesday, and a Reuters survey of 22 industry players found an average withdrawal estimation of 169 Bcf.
Tim Evans of IFR Energy Services predicted a 165-175 Bcf withdrawal, and Cooper raised his estimate Wednesday to between 173 Bcf and 183 Bcf. Golden, CO-based Bentek Energy was only 2 Bcf off with its prediction of a 164 Bcf withdrawal, based on actual storage flow data on pipelines across the nation. Bentek predicted withdrawals of 101 Bcf in the East region, 42 Bcf in the Producing region and 21 Bcf in the West. Whereas, the EIA report showed actual net withdrawals of 99 Bcf in the East, 43 Bcf in the Producing and 20 Bcf in the West. The storage withdrawal during the same week last year was 114 Bcf.
With storage and the weather pointing down, the market simply had to fall on Thursday. There were no buyers available, said Saal. “We have an instantaneous liquidity problem,” he said. Because of these higher price levels, even small moves can hurt badly, and as a result many market participants have scaled back their trading.
“The locals have scaled back their volume. When a commercial trader hits the market with a normal sized volume and the market is thinner by a third, it can be explosive.”
“There’s just a lack of liquidity,” he said. “When the storage number came out [the locals] obviously thought it was bearish, but when they went to sell it there were no buyers; it just free fell.”
However, the magnitude of the move was “most perplexing,” said Cooper. “We used to talk about a 20-cent day and that was considered a big day, even a big week, but now 20 cents is a matter of a few minutes. It’s astonishing.”
Open interest is still relatively high given this level of volatility, said Cooper. “Overall open interest is still 560,000. That’s not huge, but there are still a lot of participants. Now, more and more are moving to the back [months] of the market where we only moved 25 cents today, but the market is still at a pretty healthy level [in terms of total open interest],” he said.
Cooper said he believes eventually prices will still go much lower. Whether that happens Friday before a long weekend, “who knows; maybe, maybe not. It could be down another 50 cents tomorrow. That wouldn’t shock me that much. On the other hand, if we had a 35-cent bounce that would only retrace a quarter of today’s move and we still have a very weak week.”
He said if the weather forecasts on Friday continue to show warmth on the way, it’s likely that the market will continue lower. “If we start to get some indications that the weather could reverse back again and deliver some real cold air in the middle portion of January, we could rocket right back up because that’s historically the coldest time of the year.”
Saal agreed. He said there’s still a danger that the market could shoot for $20/MMBtu on a cold snap. “All you have to do is pull up a chart of December 2000. We went up and down a couple dollars a couple times during that month. We could come in on Monday and have all the forecasts line up saying it’s going to be colder than hell for two weeks. You know what’s going to happen? The people who sold it are going to buy it and there aren’t going to be any sellers in there.”
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