The gas market never ceases to amaze observers, but the Jan. 12-16 period could go down as among the more bizarre situations on the books, with record cash prices and gas demand in the Northeast and plummeting near-month futures. Over the last five trading days, the futures market lost $1.35 in value, or about 19%, since the close on Jan. 9, despite what many would consider very bullish fundamentals.
On Friday Jan. 16, the February contract ended the week on a 9.5-cent up-note at $5.940, but down $1.63 from the winter high of $7.57 the previous Friday. Over that same time period, numerous local gas distributors in the Northeast, including New England’s largest, KeySpan, set new gas demand records as temperatures dropped well below zero, wind chills reached 20-50 below at many New England locations and cash prices soared as high as $76/MMBtu at Iroquois Zone 2 in New York. Short-term weather forecasts also showed below normal temperatures continuing across most of the country.
The weekly storage report on Thursday morning came in on the low end of expectations at 153 Bcf, but was still the largest storage withdrawal of the winter so far, larger than during the same week in 2002 (136 Bcf) and larger than the five-year average of storage withdrawals (141 Bcf). Most observers were expecting something slightly larger than 160 Bcf, but the difference certainly didn’t seem large enough to warrant a 54-cent plunge in prices in one day. Nevertheless, it happened.
An explanation for the market collapse is more easily found among technical indicators, according to Tom Saal of Florida-based Commercial Brokerage. “We were overbought. I’d say that probably was the biggest reason [the market collapsed],” he said.
“Last Friday, I said if the market failed to settle above $7.293, then it would be a failure to retrace back above a 38% Fibonacci retracement level (off of the low of $4.39 in September) from the high in February 2002. Believe it or not, in technical analysis it had to settle above that number [for the market to continue higher]. If it didn’t settle above that number, it would be a failure; even right below it is still a failure. On a weekly basis it never settled above that number.”
Saal said there also was a classic case of “bearish divergence,” because on Dec. 10 when the market reached a high of $7.40, stochastics indicated an 80% overbought condition, but on Jan. 9 when the market hit a high of $7.57, stochastics only showed a 70% overbought condition. “We had a higher price move but lower stochastics, which is textbook bearish divergence,” said Saal.
Another factor was that futures had consistently remained above Henry Hub cash prices. “So technically this market couldn’t stay above $7, and that’s what set this whole thing up.”
He still believes that despite the large drop already in futures, the biggest risk is still to the downside. “We settled below the 40-day moving average on Thursday, which could bring out some fund selling.
“The number you want to keep in mind from now on for the rest of the winter is the approximate cost of gas in storage, which is around $5.20-25 based on the cost of injections last summer,” Saal said.
Jay Levine of Advest Inc., however, doesn’t believe there is much more room to the downside. “I personally don’t think that it’s the beginning of anything other than taking a breather, pausing to reflect and just waiting for the next influence that is going to affect the price either much higher or a little lower. In other words I still feel that the risk is still up with the understanding that there is some vulnerability below us.”
But Citigroup futures analyst Kyle Cooper notes that the surplus of working gas in storage could continue to put pressure on the market.
“Inventory levels are the second highest that they have ever been in the second week in January, yet prices were still incredibly high. I think [the share price declines during the week] were a realization that until cold temperatures descend upon larger portions of the country that inventory levels are going to be very high by the end of March.”
Cooper said he doesn’t believe the next storage withdrawal will be larger than 200 Bcf. “Houston during the whole week was 70 degrees. The cold was confined to the Northeast. [Henry Hub] cash prices never got above futures.
“I personally think futures are still way too high unless weather continues to be very cold and expands over larger portions of the country. Clearly I think Mother Nature is the key driver by far. Forecasts right now are mixed. Most of them are still looking for cold in the Northeast, but they disagree on how cold it will be and how pervasive it is going to be across the country.”
The National Weather Service’s six- to 10-day forecast on Friday calls for below normal temperatures across the entire East and basically the southern two-thirds of the nation. The rest is expected to be normal with a patch of above normal temperatures over the Upper Midwest/northern Rockies.
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