Shrugging off medium-range forecasts calling for moderating temperatures, natural gas futures shot to new 22-month highs Wednesday as traders bid the market up in sympathy with stronger cash market prices and ahead of bullish storage data due out Thursday morning. Locals sold on the higher opening, but were then quickly forced to cover their sales as the market continued higher. New longs added to the buying frenzy and the prompt month gained 25 cents in 65 minutes to reach a $5.74 high at 11:30 a.m. EDT. February closed at $5.673, up 24 cents for the session.
The coldest air in several years descended upon much of the eastern United States Wednesday driving up cash market demand. Although its average was up only 21 cents to $5.68 yesterday, Henry Hub prices rocketed to as much as $6.35 on heavy weather-related demand. New York area prices were even stronger, advancing more than $5.00 to average about $18.50 yesterday.
With January cash prices at $5.68, February futures prices at $5.673 and March futures prices at $5.608, the natural gas market worked itself into a state of backwardation. Under normal circumstances, the combination of time-value-of-money and risk premium contribute to a contango market, which is characterized by successive months increasing in price. For Tom Saal of Miami-based Commercial Brokerage Corp., the current backwardation is not uncommon for a market that is at its peak demand period. “They are calling for temperatures to dip into the 30s here [in Miami]. It is only natural for cash prices to be at a peak right now.”
Several traders polled by NGI were surprised by Wednesday’s rally, which came despite forecasts calling for moderating temperatures next week. However, after being burned by forecasts for mild temperatures before, many traders remained reluctant to bet against the current uptrend.
Also a factor yesterday was apprehension over a potentially bullish storage report set to be released this morning. Because of the current market backwardation, storage players have a huge economic incentive right now to withdraw as much gas as possible and sell it. That has led to expectations of a 200 Bcf withdrawal. If realized, a number of that magnitude would easily surpass the year-ago comparison of 126 Bcf as well as the five-year average draw of 152 Bcf. Last Thursday the market was goosed 21 cents higher by the news that 136 Bcf was pulled from the ground during the week ending Jan. 10.
Going forward, the year-on-year comparisons will continue to be bullish, says Thomas Driscoll of New York-based Lehman Brothers. Citing NOAA forecasted degree days heating for this week of 217 versus 178 last year, 222 normally and the five-year average of 199, Driscoll calls for a 185 Bcf net takeaway in next Thursday’s storage announcement. If his estimates for the next two storage reports are correct (200 Bcf and 185 Bcf), the oft-quoted year-on-year deficit would rise to 600 Bcf. Since expanding to 575 Bcf just before Christmas, this deficit has shrunk in three consecutive weeks to a level of 453 Bcf as of Jan. 10.
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