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Traders Scramble, Prices Surge Following Chesapeake Cuts
Cash markets out West and at most points throughout the country posted healthy gains as an early announcement by Chesapeake Energy that they would shut in wells and cut back drilling (see related story) boosted quotes across the board with the exception of a few New England and Eastern Seaboard points. Futures responded in kind on heavy trading volume, yet traders were circumspect about whether the market was ready to completely put the brakes on its pervasive downtrend.
At the close of futures trading February had jumped 18.2 cents to $2.525 and March had added 18.8 cents to $2.580. March crude oil gained $1.25 to $99.58/bbl.
“CIG was $2.18 on Friday and Monday it’s $2.40, but there’s no cheering going on out here,” said a Rocky Mountain producer. The Chesapeake statement was welcome, but the market still has a long way to go to reduce burdensome storage. “You’ve got over 500 Bcf surplus in storage, and the storage facilities go down for maintenance starting in late March and April, and when they do that they force most of their customers to get their gas out of storage. The market will be flooded with gas come spring.
“This has happened before, but we have never had that much of a surplus. You’ve got to get past this storage maintenance season before anything good can happen; plus government reports said production was up over 5.5 Bcf per day, so if we reduce production a half Bcf per day that isn’t going to cut it. You may get some other guys doing it so that is what everybody is waiting for.” the producer said.
Prices at other western points were strong as well. Both PG&E Citygate and Malin were up14 cents or more at just over $2.90 and $2.60, respectively.
Eastern points did not elect to join in the march higher as unseasonal temperatures prompted price declines from New England to the Mid-Atlantic. Deliveries into Transco Zone 6 NY had the day’s biggest decline with a fall of $1.20, and Iroquois Zone 1 tumbled nearly 60 cents. Tennessee Gas Pipeline Zone 6 200 Line and Algonquin Citygates skidded just over 80 cents.
Double-digit differentials were forecast for Tuesday’s high temperatures at eastern points. AccuWeather.com forecast a high in Boston of 50, 14 degrees above normal and New York was expected to enjoy a high of 52, 13 degrees above normal.
The National Weather Service (NWS) in Southeast Massachusetts forecast that a period of rain would precede a cold front Monday night followed by dry and mild weather Tuesday. Somewhat cooler temperatures were expected to return for Wednesday. “The cold front will move offshore Tuesday afternoon, and increasing westerly winds [will] bring drier air into the region. Looking across to the Midwest and at the models…the air behind the front is not significantly colder,” NWS said.
Midwest and Gulf points were firm as well. Henry Hub improved over 14 cents to just under $2.40 and ANR SE was up over 18 cents to nearly $2.45. Chicago Citygates was up more than 20 cents to just over $2.60.
Futures traders holding short positions had a rude awakening. “There’s no question the Chesapeake announcement rattled some shorts,” said a New York floor trader.
“Chesapeake was out front, but I had heard there would be more companies doing the cutbacks. We should have expected this, but it caught us all kind of offguard. I don’t know why we didn’t expect this. They do it all the time in the oil market.
“We haven’t seen an outright buy in the pit in a long time, but someone came in and bought 2,000 March contracts, and we have no idea who it was. You would have to think that this was at least a temporary change to the bearish tenor to the market. If companies get aggressive about cutting production and drilling the market could snap back $1 or more,” he suggested.
Today’s announcement may have at least partially answered the question of when a substantive supply response to low prices might take place.”The big question has been, and continues to be, “How low does this market have to go to stop or slow drilling and get producers to shut in?” Time will tell, but it seems like we are getting closer to the level every week,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.
“The market continues to be pressured by the same news: too much production relative to demand and a lack of deliverability to new markets. On a trade basis, we will continue to hold current positions. We are monitoring the market closely for any decent reason to start to take a long position. As the market drops and approaches levels we believe will start to shut down production, long trades start to look more attractive. We are not there yet but getting closer.”
DeVooght advises trading accounts and end-users to stand aside. Producers and other physical market longs are advised to hold the remainder of a November-March strip consisting of a $4.75 put option offset by the sale of a $7 call for a 16- to 20-cent debit.
Extended weather forecasts continue to be problematic for any kind of case for steady to higher prices. WSI Corp. of Andover, MA, in its morning forecast says in its 11-to 15-day outlook that temperatures across the eastern half of the country will be above seasonal norms. “Above-normal temperatures are forecast over the northern Plains and most of the eastern half of the country. The warmest anomalies are anticipated in the Northeast, where readings may average as warm as eight degrees above normal.”
WSI’s longer-term forecast also released Monday predicts colder-than-normal temperatures will dominate the nation’s northern tier beginning in February. A very strong “polar vortex has weakened significantly,” WSI said. “For this reason, the last half of winter and early spring will likely be much different than the first half of winter (see related story).
Oh, and topping off the natural gas news day, the Energy Department’s annual outlook sliced U.S. shale reserve estimates almost in half, at the same time predicting the U.S. would be a net natural gas exporter by 2021 (see related story). Traders have a lot to think about.
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