Natural Gas: After 4-Year Low, Early Spring Might Be The New Worry

Winter 2020 still has seven weeks left to go and the weather has been cold enough lately in most U.S. regions heated by natural gas. Yet, in what could be another blow for investors awaiting higher gas prices, forecasters now warn that warmer “spring-like” weather could arrive earlier this year.

U.S. gas futures have lost 16% cumulatively in three weeks, though the front-month gas contract on the New York Mercantile Exchange’s Henry Hub itself has seen some support, hovering at $1.87 per million metric British thermal units versus the four-year low of 1.80 per mmBtu struck on Jan. 19.

Natural Gas Futures Weekly Price Chart

With the U.S. Energy Information Administration expected to report a higher draw from gas storage for the week ended Jan. 24, expectations have risen among gas bulls in recent days that the front-month contract could rise and hold above $1.90 — and perhaps make a return to the psychologically important $2 level.

Mild Conditions Forecast After This Week’s Cold

But dashing those hopes are new forecasts published Wednesday showing mild warmer conditions might return to key gas-fired heating zones.

Some analysts are even betting that early “spring-like” conditions might be felt in some patches by the time the NFL Super Bowl is played this weekend, on Sunday, Feb. 2. Spring officially does not start till March 19.

“Forget the Groundhog!” wrote Phil Flynn, senior market analyst for energy at the Price Futures Group in Chicago, in a note Wednesday. “Early spring means that on Super Bowl Sunday, the Groundhog will predict an early spring.”

Bret Walts meteorologist at BAMWX, said that while the cold-bias has been on for more than a month, “we would generally expect to continue to see data trend warmer over the next few days.”

Nice Taste of Early Spring?

Adds Walts:

“We do not see good signals right now to support any extended cold and we favor warmer than normal temperatures for the Eastern U.S. to continue into mid-February. Some areas early next week in the Southeast U.S. to Ohio Valley could get into the 60s and 70s (Farenheit) for a nice taste of spring!”

Two other analysts — Dan Myers at Houston-based gas risk consultancy Gelber& Associates and Dominick Chirichella at the Energy Management Institute in New York — have similar views.

“Weather forecasts for next month currently project a mild first half February, particularly in population centers of the eastern U.S,” Myers said on Wednesday. “Without assurance of a significant invasion of cold on the horizon, and ample gas in storage thanks to a benign winter so far, the market is further discounting the end of the peak season.”

Chirichella says that while weather models showed some extreme cold anomalies into the interior of the U.S. West and High Plains, “the model trended a bit warmer across the Eastern U.S., showing more significant warm anomalies.”

Risk of Even Lower Gas Prices

So, what does this mean for gas prices?

David Thompson, vice president at Powerhouse, an energy-focused research and trading group in Washington, thinks $1.60 levels may be coming before the winter is through.

“We’ve kept breaking through prior lows, prior significant lows,” Thompson said in an interview with naturalgasintel.com published Wednesday. “It’s been an unmitigated slide lower all the way through this winter.”

From a technical standpoint, Thompson said bulls will want to defend Henry Hub’s most recent low of $1.83.But a break below that “opens the door down into the $1.60s, those lows from 2016,” Thompson said.

Brief Upside Likely From Impending Storage Report

Despite such pessimism, Henry Hub’s front-month might see some supportive action on Thursday after the release of the weekly EIA gas storage report, due at 10:30 AM ET (15:30 GMT).

The consensus among analysts is that the EIA will report that utilities drew 195 billion cubic feet of gas from storage during the week ended Jan. 24.

That would be more than double the previous week’s draw of 92 bcf. It would also outstrip the 171 bcf consumption seen during the same week a year ago and the five-year (2015-2019) average withdrawal of 143 bcf for the period.

Myers said there was even the possibility for a pull as high as 200 bcf due to last week’s sudden uptick in heating demand and expected reduction in gas production.

“However, following this draw, there will be a stark return to smaller storage decreases with the reappearance of mild weather extending into early February.”

But Draws After This Will Disappoint Again

Underscoring Myers’ view, an early Reuters poll for the current week showed a draw possibility of just around 105 bcf, versus 228 bcf from the same week last year and 143 bcf on the five-year average.

Last week’s outsize draw came amid a surge in the number of heating degree days (HDDs), which are used to calculate heating demand for homes and businesses based on temperatures averaging below 65 degrees Fahrenheit (18 Celsius). Last week, there were 198 HDDs, on par with a 30-year average of 200 HDDs for the period, and way above the previous week’s 138 HDDs.

U.S. gas production was also estimated to have retreated from recent record highs last week, averaging just 94.1 bcf per day in the lower 48 states, versus the prior week’s 94.6 bcfd.

Despite the cold snap, bigger gas draw and lower production, total gas left in storage last week was still estimated to be higher than year-ago levels and historical five-year averages.

According to estimates, if the EIA reports the 195 bcf draw expected by the market, total gas stockpiles would still stand at 2.752 trillion cubic feet — 7.8% above the five-year average and 23.9% above the same week a year ago.