Futures faltered for a second-straight day

markets

Mixed demand outlooks weighed on markets

Cash prices snapped a five-day win streak

Natural gas futures flip-flopped between gains and losses early on Friday, as traders weighed fluctuating weather forecasts against renewed strength in U.S. liquefied natural gas (LNG) volumes. Still, futures ultimately finished in the red as the cloud of a bearish storage report from a day earlier — and the light winter heating demand it reflected — hung over markets.

The March Nymex gas futures contract settled at $2.564 on Friday, down 10.0 cents day/day. A day earlier, in its debut as the prompt month, March shed 3.8 cents.

The April contract, meanwhile, fell 8.3 cents to $2.592 on Friday.

Analysts at The Schork Report noted that March traded at a discount to April, as it has since December. They said this “is a clear bearish fundamental telltale,” given that trading for March still represents the winter season, when demand for natural gas is typically at its peak.

NGI’s Spot Gas National Avg., meanwhile, dropped 56.0 cents to $2.860, snapping a five-day win streak.

Bespoke Weather Services noted early Friday that both the American and European weather models were colder versus 24 hours earlier, yet the overnight data from the European came in warmer versus Thursday’s afternoon run. Both models tilted slightly warmer at midday Friday.

“Storm-induced variability is still the theme over the next week or so, followed by a more substantial push of cold into the central/western U.S. next weekend into the following week,” Bespoke said.

The anticipated spell of freezing conditions over the next two weeks could drive above-normal gas-weighted degree days nationally, the firm said, even though the coldest temperatures were not expected to reach the East. 

“We still side with colder risks, overall, in this setup,” Bespoke said. However, the mixed outlook failed to impress markets Friday. “Given how cold has failed to materialize all winter, we feel expectations are skewed away from cold here, at least somewhat.”

EBW Analytics Group said the direction of gas prices hangs on national heating demand proving strong in February. If cold wins out, the firm said, it could trigger substantial storage withdrawals and boost futures.

Should that develop, it would mark a shift in momentum from the most recent U.S. Energy Information Administration inventory assessment. EIA on Thursday reported a withdrawal of 128 Bcf from natural gas storage for the week ended Jan. 22, falling short of expectations.

Temperatures were above average during the covered week, including in the Midwest, a key driver of gas demand during the winter. Ahead of the report, results of major polls had clustered around an expectation for a pull in the high 130s Bcf.

The latest withdrawal decreased inventories to 2,881 Bcf, though stocks were above the year-earlier level of 2,803 Bcf and above the five-year average of 2,637 Bcf. 

A year earlier, EIA reported a decrease in inventories of 170 Bcf. The five-year average withdrawal for the comparable week is 174 Bcf. The agency recorded a pull of 187 Bcf from storage for the week ended Jan. 15, the largest decrease of the current season.

Steeper Pull?

Looking to next Thursday’s scheduled storage report, analysts are generally expecting a steeper pull, with early estimates in the 180s Bcf. Bespoke preliminarily estimated a withdrawal of 185 Bcf. The bullish outlook comes on the heels of a week defined by extreme cold over much of the northern United States that spurred robust heating demand.

LNG export levels also gathered momentum during the week. After declining below 10 Bcf over several days a week earlier, LNG volumes climbed back above 11 Bcf in the last week of January, near record levels.

The latest EIA number “was weak, to be sure, though we have LNG volumes back up near highs, and production having edged a little lower,” Bespoke said. “Power burns also have made some improvement in our weather-adjusted model.”

Should demand from Asia and Europe for U.S. exports hold steady into February alongside continued cold, observers say storage withdrawals could be steep into February. Bespoke’s model estimates a pull of 160 Bcf for the first week of February and a withdrawal of 190 Bcf for the second week of the month.  

Looking ahead to spring, analysts said weather-driven demand may fade but the potential for stronger economic activity could drive up commercial and industrial energy needs, helping to fill the void. This is dependent, of course, on coronavirus vaccination programs gaining momentum in the weeks ahead and curbing outbreaks of the disease.

While wildcards continue to pop up – including the recent discovery in the Lower 48 of a South African coronavirus variant thought to be more resistant to vaccines than other strains – recent data point to improvements on the pandemic front early in 2021.

Johns Hopkins University, which has tracked the virus since its known arrival in the United States in early 2020, said hospitalizations of patients with Covid-19, the disease caused by the virus, declined in the final week of January to the lowest level of the year. Daily cases hovered below 200,000 for most of the past two weeks – after hanging above that threshold late in 2020 and early this year.

Against the backdrop of a potentially eased health crisis and improving economy, analysts at Wells Fargo & Co. said Friday they were upbeat on gas prices. They noted that production, while recovering from its lows in 2020, remains below its pre-pandemic highs and is expected to trail demand this year.

“We see U.S. gas supply fundamentally constrained,” the analysts said Friday, “while demand should remain relatively resilient.”

Cash Prices

Spot gas prices sputtered in the Northeast after exceptionally robust gains the two previous days, giving up enough ground to drag the national average into the red for the first time in a week.

Algonquin Citygate shed $6.180 day/day to average $5.440, while PNGTS dropped $4.300 to $5.645.

Snowy and freezing conditions continued to blanket much of the Northeast on Friday, with Boston expected to see lows in the single digits Friday night. However, temperatures were expected to warm into the 30s and 40s in the week ahead, allowing traders to back away from demand at the close of the week.

NatGasWeather said winter storms brought rain and snow across the West, with cool highs of 30s to 50s on Friday. Temperatures also were chilly over much of the northern half of the United States, with highs of 10s to 40s.

Against that backdrop, cash prices were up at a majority of hubs across the Lower 48.

Chicago Citygate picked up 3.5 cents to $2.620, while El Paso Permian advanced 4.0 cents to $2.535.

Henry Hub gained 7.0 cents to $2.670 and Dominion North climbed 8.5 cents to $2.380.

Though heavy snow was expected in parts of the East, national demand was projected to ease over the weekend with high pressure building across the central and southern United States, NatGasWeather said. Further rounds of cold winter rain in the West and snow in the Midwest were expected to return during the first week of February, the firm said, keeping alive prospects for strong heating demand in the days ahead.