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Natural Gas: Bulls and Bears Play ‘Hide-and-Seek’ at Mid-$2

Published 02/16/2023, 04:41 AM
Updated 08/14/2023, 06:57 AM
  • Since losing $3 perch, the mid-$2 support for natural gas has been fleeting
  • Bulls aimed for small advances while trying to prevent a return below $2.40.
  • Bears are trying to get the market to $2 without mass position-taking, like in Jan.
  • Cold weather is expected again end-Feb but it might be too little, too late

‘Now you see it; now you don’t’ — the mid-$2 support for ​​natural gas, that is.

Since the heating fuel’s front-month contract on the New York Mercantile Exchange’s Henry Hub lost its $3 perch on Jan. 30 — hitting a 20-month low of $2.341 four sessions later — the mid-$2 support has been hit-and-miss for longs in the game.

Of the 14 trading days in the $2 range, wins and losses have been symmetrical, with both bulls and bears claiming seven days each. What’s different is the size of the moves. For shorts, the biggest win was a 14% plunge on Jan. 30, while for longs, the largest gain was 6.7% on Feb. 14.

Long story short, neither side has been able to create a parabolic spike or cataclysmic implosion that natural gas and its volatility are notorious for. Instead, the action of the past three weeks can best be described with a phrase quite uncharacteristic for gas: Flat.

That’s exactly what it was, as both sides deployed caution. The bulls aimed for small advances while trying to prevent a return below $2.40. The bears tried to steer the market toward the next critical support of $2 without the kind of massive position-taking seen a month back.

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Sunil Kumar Dixit, Chief Technical Strategist at SKCharting.com, said Henry Hub’s front-month contract was at such an inflection point that it could violently move up as much as $1+ if storage drawdowns of gas surprise over the next three weeks. Alternately, chart signals were indicating a test of the $2 support if the lift through in demand doesn’t come, Dixit said, adding:

“As futures have been rising calmly within an ascending channel with support at $2.45 and $2.35, the upward move would aim to clear $2.68 to reach the $2.78 and $2.88 critical barriers, which would serve as an acceleration point for a further upside towards $3.1, $3.3 and $3.5.”

At Wednesday’s settlement, the benchmark March gas contract on the hub settled at $2.471 per million metric British thermal units, or mmBtu. At the time of writing, it hovered at just above $2.50.

Natural Gas Daily Chart

On the flip side, Dixit believes “a sustained break below $2.35 support will push prices down towards $2.15 and eventually $2.”

Part of this week’s upside for gas came from the larger feed volumes noticed at Freeport LNG, the Texas-based liquefied natural gas export terminal, which was slowly clambering back to life after being shut following a June fire at the plant. Freeport, which once handled 2 billion cubic feet, or bcf, per day of gas, this week received up to 0.7 bcf daily — or 30% of its capacity.

While the plant remains in the early stages of a restart mode, the incrementally higher volumes of gas it is handling each day are a sign that it is moving in the right direction.
That aside, there was a sentiment boost from the U.S.-based GFS and the European ECMWF weather forecast models, suggesting colder trends toward the end of this month.

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Of the two, the ECMWF model was the more bullish, forecasting a late February and/or early March cold outbreak.

Those forecasts bumped up expectations for Gas-Weighted Degree Days, or GWDDs, staying at or above long-term averages.

Combined, the Freeport factor and weather forecasts helped the market from ceding the last vestiges of $2 support.

Yet, as the saying goes, all these might be too little too late in a winter that incredibly hasn’t delivered a single major snowstorm to the U.S. North Eastern region, which forms the country’s largest gas-driven heating market.

Trade journal naturalgasintel.com said in a post:

“The ongoing warmth that has pressured futures and cash prices alike in recent weeks is showing few signs of a lasting turnaround based on the latest weather data.

Models continue to show only a brief period from Feb. 22-26 as having any meaningful cold weather to boost demand. The rest of February should see moderate temperatures and, thus, light demand at the national level.”

Natural Gas Storage Changes

 Source: Gelber & Associates

There will be further clarity on gas supply-demand today when the Energy Information Administration, or EIA, provides its update on natural gas storage levels for the week ended Feb. 10.

On average, industry analysts tracked by Investing.com are anticipating the EIA to report that U.S. utilities pulled a smaller-than-normal 109 bcf from storage last week. This is due to less-than-usual cold weather at this time of the year that has hit heating demand.

EIA data shows a 195-bcf withdrawal during the same week a year ago and a five-year (2018-2022) average decline of 166 bcf.

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In the prior week to Feb. 3, utilities pulled 217 bcf of gas from storage.

If correct, the forecast for the week ended Feb. 10 would cut stockpiles to 2.257 trillion cubic feet — or tcf. That would make inventories about 16.5% higher than the same week a year ago and 8.4% above the five-year average.

Said analysts at Gelber & Associates, a Houston-based research and trading consultancy for energy markets:

“The US gas market remains unquestionably bearish from the underlying supply/demand perspective. The current supply glut on hand will only become more pronounced as the late winter winds down, and the lower demand springtime enters the picture.”

Naturalgasintel said that after the next two government inventory reports are accounted for, surpluses are expected to increase to more than 260 bcf ahead of the brief cold snap that could arrive in the Lower 48 U.S. states by around Feb. 22.

Lending some color to the situation, The Schork Group said in comments carried by the trade journal that Boston residents “could count on two hands” the number of significant, or 5% above the seasonal trend, heating degree days, or HDDs, the city has experienced this winter.

“The situation is just as bad in the Midwest,” analysts at Schork added. They noted this is particularly bad for bulls, given the region is the largest gas furnace market in the Lower 48.

While the late-February cold snap may slow the surplus from expanding further, real cold temperatures will be needed from Feb. 27-March 3, said those in the know. Adds NatGasWeather:

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“That’s where the weather data isn’t as convincing as needed if it’s to be expected.”

***

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about. 

Latest comments

Barani hard stop at 1.8 lol. Love this KOLD. Keep milking I. KOLD to reach 100 by next Friday KOLD century is confirmed
No more hide and seek $2 and lower Boil under 5 almost there and 10:1 reverse split announcement imminent from Proshares Nibbling start after $2 Day and night prediction This is called right on money
Bottom is falling It’s going to break 3.341 today Guys how many times I have to reiterate Here is one more time Boil to go under 5 by feb24 and do reverse split Wait for Proshares announcement on 10:1 reverse split and save your shirt shorts etc NG to go down $2 or lower by Feb 24 You need to nibble as NG reaches to $2 buy boil at 35-40 range after split KOLD KOLD KOLD
The problem is the train wreck in Ohio, and, as bad as it is,  it would be nothing compared to the effects of a similar derailment of LNG. It's got people thinking about making changes about regulating the transportation of LNG.
Great take, as usual
Curious where Barani found that $3 Perch. Has to be farm-raised.
LOL ... I meant that it fell from $3 levels since Jan. 27
Read whole report and found nothing new
dont give them the number without charging premium subscription! Lol
 I won't! LOL :)
  Some people just wanna whine, not contribute.
byyyy
Nice one, Barani.
Thanks much, JK.
Nobody can see Bear with all the manipulated news n analysis.........
Nothing "manipulated" here, I can tell you.
Good work 🤙👍👌🦬👋
Spring is here☀️⬇️🔽⤵️
Yes, Jay. It certainly feels so. LOL :)
Barani: Being a bull who bought in at 2.76, what you write is not good news for me. However, what you write is a clear picture that helps me decide what my next move will be. I will hold my longs and average down if it gets to $2.00 or below. But as you mentioned, it is trading unusually flat with low volumes, which is preventing me from averaging down or getting out of my position. Thanks Barani
Same as you. I'll hold my long position till this kind of trench warfare gonna break. It's boring but have to prepare for the worst scenario, i guess.
Hello JY, that's a toughie man. I'm not sure the downdraft is going to be completely over till storage accumulation begins again for the summer. Unless March totally surprises in terms of remaining winter, the bears might not stop till the $2 test. Anyway, you could get fortunate if volatility returns and momentum builds on the upper side of $2.50.
Bests to you too, mate.
Very good reading... end-of-March inventory as of now looks very bearish vs 5y average to the tune of 15% higher... I am not sure that weather can compensate that in next four weeks, and only production cuts may remedy current oversupply
Thanks much, DB. That really is the situation. We could be 15% higher in storage with today's report, and that would be a nerve-racking number in itself.
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