For a while, it looked invincible at the top of the commodities heap, as forecasts rolled out for bitter cold in the months ahead while inventories of the fuel available for heating were at multi-year lows. But with the 2018-19 winter finally here, albeit warmer than thought, natural gas doesn’t look that mighty any more, with prices that could be more prone to falling than rising.
With just one session left for the year-end after Friday, the market is showing an annual gain of just under 20 percent.
Mixed Weather Chipping Away At Gains
Natural gas was up nearly 60 percent six weeks ago, powered by an early blast of pre-winter chill, before mixed weather began chipping away at its returns.
While the earlier gains put gas at the top spot for commodities performance this year, current returns only give it third spot after cocoa and wheat, which are up 25 percent and 20 percent, respectively (desktop users, click here and go to “performance” to see all commodity returns for 2018).
Dan Myers, analyst at Gelber & Associates, a Houston-based consultancy for natural gas, said the trade was actively scouring weather models for another bout of sustainable cold, which appeared elusive.
Traders Beginning To Lose Faith In Quick Return To Cold
Myers added:
“Recent trading has been of the technical variety as the market continues to monitor weather forecasts for any change that could drive another big move. However, with the latest forecasts wiping out strong cold in early January, the market is beginning to lose faith.
The burden is now on colder-than-normal winter weather to materialize more convincingly if it is to prevent prices from slumping further.”
Until those frigid conditions arrive, traders will be paying more attention than ever to weekly supply-demand data of gas. The latest of that, for the week ended December 21, is due at 11:00 AM ET (16:00 GMT) on Friday. The US Energy Information Administration, which will be issuing the figures, is expected to report a drawdown of 52 billion cubic feet for last week, or just about a third of the 141 bcf cited for the week ended Dec. 14.
Even with that 141-bcf draw, the second triple-digit weekly consumption of gas since the start of the cold season in September, the market was volatile, rallying sharply at first and then falling just as dramatically on concerns that demand for heating will be tepid in coming weeks due to mixed weather.
Record Output Matched By Demand Earlier In The Year
It has been a tricky year for the fuel. Huge volumes of gas, sourced from primary drilling and also obtained in secondary form during drilling for shale crude, has led to record output in 2018—not unlike the situation in crude oil.
Despite such overwhelming production, storage levels of gas never got out of hand, thanks first to strong summer heat, followed by an early bout of cold, that kept air-conditioners and heaters on overdrive since June. In fact, gas reserves before the start of winter were under the 5-year norm.
That aside, a surge in the export capacity of liquefied natural gas has also boosted the demand equation for US natural gas this year. From just around 3 bcf per day a year ago, LNG export capacity is almost at 5 bcfd now. The EIA expects it to reach nearly 9 bcfd by the end of next year, making the United States the country with the third largest LNG exporting capacity after Qatar and Australia.
Whipsaw Volatility Hasn’t Helped
While prices north of $3 per million metric British thermal units had been the norm lately, a colder-than-usual November pushed the market to nearly $5 per mmBtu at one point.
But there has also been whipsaw volatility in recent weeks, with daily swings of up to 18 percent – three times more than last year’s peak.
Independent gas analyst James Hyerczyk said in an analysis Wednesday that there was still a lot of uncertainty over next week’s weather forecasts.
Hyerczyk wrote:
“Traders could start pricing in cold snaps that are forecast for January 1-3 and January 6-9. However, there are still milder patches predicted for December 31-January 1 and January 4-5. These forecasts don’t seem to be impressive enough to sustain a long-term rally.”
Highs North $3 Seen Staying Though Capitulation Still Possible
Even so, some forecasters were pricing in significant cold for February that could cross over into March, Hyerczy kadded.
The analyst concluded that the mixed technicals and the fundamentals would keep gas prices in their sideways trend. At Thursday’s settlement, the most-active gas contract on the New York Mercantile Exchange, March, settled at $3.353 per mmBtu.
He said March gas could attempt to take out its next resistance of $3.659 if the upward resistance held. But if the market capitulated for any reason, then it could break under $3.109, triggering a slide that could go all the down way to a November 2 bottom of $2.890.