Faced with a significant national warm-up following three weeks of arctic chill, natural gas futures traders put pressure on prices to the downside Tuesday as forecasts on the duration of the warm-up seemed to fluctuate a bit.
The February contract reached a low of $5.444 during Tuesday’s regular session before closing the day at $5.557, down 13.4 cents from Friday’s close.
“The natural gas market is under pressure from the warm temperatures forecast in the two- to five-day period, the warmest span of the near-term outlook,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “The six-to 10-day forecast looks more moderately bearish while the normal readings projected for the 11- to 15-day period should be more nearly neutral. If the forecast for Jan. 29-Feb. 2 does hold up as normal, it will provide a useful gauge of the underlying supply/demand balance in our view, a test of whether neutral temperatures translate into neutral storage withdrawals.”
Taking an early peek at the storage report Thursday for the week ending Jan. 15, Evans said he expects a withdrawal that is significantly smaller than the previous week’s 266 Bcf pull, but noted that the number will likely still be much larger than historical comparisons for the week. The analyst’s early prediction is for a 215 Bcf draw, which would be well above last year’s date-adjusted 164 Bcf pull and the five-year average pull of 118 Bcf.
When markets receive bullish or bearish input much like Thursday’s stout inventory report and don’t move in the direction anticipated, analysts note that it is often a sign that whatever (in this case, bullish) enthusiasm existed is waning or nonexistent. “The weekly gas storage [report] was a whopper, minus 266, when the trade was looking for a minus 256. But not even a high draw was able to give the gas market much of a boost,” noted Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.
It is DeVooght’s opinion that natural gas market strength is being hampered by “a weak energy complex and declining commodity prices in general. Forecasts for the end of the colder-than-normal temperatures were the main reason gas prices broke early in the week. On a trading basis, we will continue to hold our floors and collars,” he said in a note to clients.
DeVooght advises trading and end-user accounts to stand aside, and producers to hold on to the remainder of a $5-8 collar that began back in August at a cost of 35 cents. Producers should also continue to hold a 12-month option strip that began in December consisting of long a $5.50 put and short a $7.50 call.
The warm spell enveloping the East and Midwest is not forecast to retreat any time soon, according to one weather service. Forecaster WSI Corp. of Andover, MA, said that over the 11- to 15-day period “warmer-than-normal temperatures are still forecast over north-central and northeastern U.S. Anomalies as warm as six to seven degrees above normal are anticipated in the warmest locations.” WSI predicts above-normal temperatures north of a broad arc extending from North Dakota to Tennessee to Maine. It added that colder-than-normal readings were expected to grip the southwestern U.S.
WSI cautioned that over the period “temperatures may trend warmer over the western U.S. and colder over most of the eastern two-thirds of the country than currently forecast. [Weather] models suggest the progressive and zonal subtropical jet stream over North America may weaken in late January and early February.”
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