From a near 2-year high of almost $3.40, natural gas prices lost 10% in a flash—during just three days this week.
For a commodity so notorious for its volatility that it’s sometimes referred to as the ‘Bucking Bronco’ of the energy space, such a drop is virtually nothing.
Yet, in the grander scheme of gas pricing, it is a concern to bulls in the trade because it hints at something else: a possible test and break of the $3 per mmBtu, or million metric British thermal units, level the market has held the past week as support.
And with a snap of pre-winter cold in play since mid-October looking set to wane in the coming weeks, those concerns are growing.
Dan Myers, analyst at Gelber & Associates, a gas risk consultancy in Houston, Texas, said in a note to the firm’s clients on Wednesday:
“After trading at nearly 21-month highs approaching $3.40/mmBtu with December as the prompt contract, the market’s recent bullishness continues to be tempered by a wave of relative warmth settling over the eastern US in the first half of November.”
“As a result of this milder weather, demand expectations have been slashed, subsequent storage changes have been adjusted upwards, and the December contract has moderated towards support at the $3/mmBtu mark today.”
December, the front-month gas contract on New York’s Henry Hub, hovered at just under $3.040 per mmBtu, down 0.8%, at 2:00 AM ET (0600 GMT) Thursday. It had held the $3 support since Oct. 21, and got to a 22-month peak of $3.396 on Oct. 30, or last Friday.
Milder Temperatures In The Cards
The benchmark gas contract’s move toward a potential test of the $3 support came amid changes to weather and heating demand patterns that have largely held over the past two weeks.
Myers wrote that “weaker changes” will follow for several weeks, allowing a “transition period” for gas storage, before winter withdrawals hit full steam.
“One of the most surprising developments this week has been the appearance of forecasts for at least one more weekly net storage injection.”
The U.S. Energy Information Administration’s weekly storage report on natural gas, due at 10:30 AM ET (14:30 GMT) today, is expected to show a withdrawal of 26 bcf, or billion cubic feet, from inventory for power generation and heating needs.
In the previous week to Oct. 23, utilities injected some 29 bcf into storage.
The anticipated withdrawal for the week ended Oct. 30 will compare with the storage build of 49 bcf during the same week a year ago and a five-year (2015-2019) average injection of 52 bcf for the period.
If analysts are on target, the decrease during the week ended Oct. 30 would be the first withdrawal of the 2020-2021 winter season—coming about two weeks earlier than usual—and would reduce stockpiles to 3.929 trillion cubic feet (tcf).
That would still be 5.7% higher than the five-year average and about 5.6% above the same week a year ago.
The weather was colder than normal last week with 105 heating degree days (HDDs) compared with a 30-year average of 75 HDDs for the period, according to data from Refinitiv.
HDDs, used to estimate demand to heat homes and businesses, measure the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 degrees Celsius).
Myers wasn’t the only analyst calling for a change in weather patterns for the coming week.
Anomalous, Record-Breaking Warmth?
Dominick Chiricella, director of risk and trading at the Energy Management Institute in New York, wrote in his Wednesday market advisory that “anomalous and potentially record-breaking warmth” will spread eastward across the U.S. over the next few days.
A surge of cooler air will plunge across the western U.S. by days 4-5 and will expand into portions of the North Central U.S. by days 7-8.
Chirichella adds:
“Considerably above normal temperatures will surge across the interior West and central US today into Thursday and will continue to build eastward by Friday and this weekend.”
The peak warm anomalies look to favor areas from the Central Plains to the Great Lakes, where readings 15-25 degrees above normal will develop.
Highs will reach into the 70s for locations such as Chicago and Minneapolis for much of the remainder of this week and into the weekend, while 70s will look to spread into much of the Northeast and Mid-Atlantic by Saturday and Sunday.
Cooler anomalies should return to the Northwest by Friday and build across the western U.S. over the weekend as a trough digs across the region.
Chirchella said by the start of next week, the core of the warmth will favor the Eastern U.S., where readings of 12-22 degrees above normal look to become entrenched during the day 6-10 period.
“Record high temperatures may develop across the Northeast Monday through Wednesday. Meanwhile, a more potent cold front will look to emerge from the west into the North Central U.S. by days 7-8, ushering in below normal temperatures to the Northern/Central Plains, and may expand as far east as the Mississippi Valley and western Great Lakes.”
The warmth in the eastern U.S. should diminish during the day 11-15 period, though above normal temperatures are still favored.
Chirichella added, citing the GFS, or Global Forecast System, and ECMWF, or European Centre for Medium-Range Weather Forecasts, weather models:
“Modest warm anomalies are expected to build across the Central U.S. during the day 11-15 period. The 12Z GFS does usher in cooler anomalies to the central and eastern US during the period, but it is not in agreement with either the GFS or ECMWF ensembles, and is thus given minimal weight.”
Disclaimer: Barani Krishnan does not have a position in the commodities or securities he writes about.