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Natural Gas Seen Nearing $4 If More Shocks After Texas Deep-Freeze

By Investing.com (Barani Krishnan/Investing.com)CommoditiesFeb 18, 2021 04:04AM ET
www.investing.com/analysis/natural-gas-seen-nearing-4-if-more-shocks-after-texas-deepfreeze-200561555?utm_source=yahoo&utm_medium=referral&utm_campaign=yahoo_finance
Natural Gas Seen Nearing $4 If More Shocks After Texas Deep-Freeze
By Investing.com (Barani Krishnan/Investing.com)   |  Feb 18, 2021 04:04AM ET
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Call it the black swan event of natural gas.

Just like how COVID-19 totally threw the world off guard, the Artic freeze that’s paralyzed part of the energy production in Texas has caught the US energy capital completely unprepared.

Horror story-like reports in the media tell of millions of Texans struggling without heat and electricity after the worst snowstorm in 30 years in the typically sweltering state. Those with power have a different nightmare: thousands of dollars in bills as electricity rates skyrocketed overnight. 

But that’s not all.

An Occurrence As Rare As A Pandemic

Prompt prices of natural gas are already at $4 per mmBtu, or per million metric British thermal units, at some hubs. And the entire one-year calendar strip on NYMEX’s Henry Hub futures, from March 2021 to March 2022, has flipped to above $3—an occurrence as rare as a pandemic itself.

Natural Gas Daily
Natural Gas Daily

The last time Henry Hub gas got to $4 levels was between November and December 2018, when it traded at highs of between $4.50 and nearly $5.

At Thursday’s pre-New York open, Henry Hub’s front-month March gas hovered not far from the previous session’s 3-½ year high of $3.316. Natural gas futures are already up almost 30% year-to-date, running parallel with the gains in gasoline, the biggest beneficiary thus far from this year’s energy rally. 

To get to $4, Henry Hub futures need to rise another 25% from current levels. A lot may depend on how quickly the Texas situation is rectified and that might be a big ask. On Tuesday, after snow blanketed the state, Governor Greg Abbott announced that natural gas was freezing in the pipeline and freezing at the rig.

Natural gas is the fuel that heats the majority of homes in Texas and powers a substantial portion of the state’s 680 electric generating plants. And gas pipelines, rigs and production equipment in Texas were not hardened to handle the cold, just as the generation and transmission infrastructure under state power grid ERCOT wasn’t “winterized.”

Gas Supply Across US Also Worrying

Even if the Texas situation improves rapidly, there is gas supply for the rest of the country to worry about.

Data compiled by Bloomberg and naturalgasintel.com showed output dipping to 72 billion cubic feet per day by Wednesday, “a level not seen consistently since January 2017,” according to NGI Director of Strategy & Research Patrick Rau.

For perspective, gas output from the lower 48 states was above 90 bcf per day just 10 days ago on Feb. 5.

Another supply shock from the current Arctic event could tip Henry Hub futures toward $4 and beyond.

Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, said “cash market explosiveness” in the Midcontinental and Texas markets has given optimism for Henry Hub’s front-month March contract, identified by the NGH21 symbol, to keep grinding higher. Adds Shelton:

“Prompt prices at +$4 for Feb Hub and $3.30 for the last week of February suggests that NGH21 now has upside and just needs the 11-15 day to start looking  like the 6-10 day.”

Market Madness

Houston-based Gelber & Associates, which serves as a consultancy in gas market risk, characterized the supply-demand situation as “Market Madness” in an email on Wednesday to its clients and Investing.com:

“The madness in the natural gas market continues, with production estimated under 75 Bcf/d today, below 2018's levels in a severe, near-20% reduction since last week.”  

“Residential and commercial demand is beginning to come off its peak from earlier in the week but remains very elevated. Total seasonal residential and commercial, industrial, and power demand were estimated at what could be an all time high above 135 bcf per day on Monday.”

Natural Gas Average Prices
Natural Gas Average Prices

Chart courtesy Gelber & Associates

The Gelber note concurred with ICAP’s Shelton that Midcontinent and Texas dominated Wednesday’s price action in physical gas, citing Kansas and Oklahoma spot prices above $500/mmBtu and Oneok at $1,250.

Yet, some conflicting readings on the weather suggested that a thaw in temperatures may be setting in. Naturalgasintel.com said in a blog that “the worst of the coldest temperatures have passed as conditions gradually moderate in the days ahead.” The forecaster added that rather than lows plunging as low as minus 20 degrees, the region could see overnight temperatures from sub-zero to the 30s.

There is some discrepancy, however, in the Global Forecast System model and its European counterpart, which is “neutral to potentially a touch bearish,” according to the most recent run.

NatGasWeather added:

“But we do caution, the start of March needs close watching because it wouldn’t take much of a colder trend for the pattern to quickly look more intimidating, although any further milder trends and the pattern would take on a rather bearish stance.”

In between the market’s attention on the storm comes Thursday’s weekly gas storage report from the US Energy Information Administration at 10:30 AM ET (15:30 GMT).

Gargantuan Draw Expected

Industry analysts tracked by Investing.com expect the EIA to report a gargantuan draw 252 bcf for the week ended Feb. 12—some 47% higher than the 171 bcf burnt during the previous week to Feb. 5 for heat and power generation. 

If accurate, it would be the highest storage draw since the all-time high of 359 bcf from 2018.

One other thing that’s making less news in gas this week, though it’s very much in the scheme of the news in gas: LNG, or liquefied natural gas.

LNG terminals in Texas slashed demand after Governor Abbott asked exporters to curb operations in order to help ERCOT avoid an even more dire system outage, naturalgasintel.com reported. 

Freeport LNG shut down the second and third production units at the facility on Tuesday, the company said in a regulatory filing. The first train was shut on Monday because of freezing conditions that affected a pretreatment facility.

Cheniere Energy (NYSE:LNG) also is said to be diverting vessels away from Corpus Christi to Sabine Pass in an effort to curb electricity use. Meanwhile, power was restored at Cameron LNG in Hackberry, LA, which is working to ensure it can safely restart operations.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. As an analyst for Investing.com he presents divergent views and market variables.

Comments are welcome and encouraged. Inappropriate comments will be reported and removed.

Natural Gas Seen Nearing $4 If More Shocks After Texas Deep-Freeze
 

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Natural Gas Seen Nearing $4 If More Shocks After Texas Deep-Freeze

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Comments (8)
Murabaa Genral
Murabaa Genral Feb 18, 2021 3:53PM ET
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Any chance it will spike up in feb month to 3.5???
Barani Krishnan
Barani Krishnan Feb 18, 2021 3:53PM ET
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Murabaa, thanks for writing in. NatGasWeather expects a thaw in the coming week's temperatures, so we may actually get a reprieve from high $3 gas. The probability for near $4 pricing is there only if you have more shock events like Texas. We'll have to see how the weather turns out.
Robert Flores
Robert Flores Feb 18, 2021 3:17PM ET
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The only hype is in the title, the article, as always, objective for the most part, I cant blame you, if I were a writer I would always make the headings pop out
Barani Krishnan
Barani Krishnan Feb 18, 2021 3:17PM ET
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Robert Flores, thanks much for understanding the tough part of a writer's life. The aim is not to sensationalize, as you rightly understood, but to draw in the reader, articulate clearly all the variables at play and then let the person decide. Unfortunately, in today's algorithmic world, headlines become the driver in trading decisions --- resulting in blame being heaped on the writer. I'm blessed though for having mature readers like you. Thanks again.
Barani Krishnan
Barani Krishnan Feb 18, 2021 12:56PM ET
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To KL CI who commented below. Read the story properly before you comment. The article says very clearly that the potential for $4 pricing is only there if more supply shocks come out of this. Do not attempt to sensationalize your own response by throwing buzz words like "Reddit" here. The people quoted in this story have used much thought processes to contribute to this article;  they are professionals with years of experience tracking the natural gas market. They are not your typical retail investors who bask in hype. Also be courteous when you comment, and more importantly, READ first. It will help a lot if you do a little thinking before firing away. Thank you.
KC Cl
KC Cl Feb 18, 2021 12:39PM ET
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Nat gas futures are not going to $4, please stop the hype, is this Reddit?
Barani Krishnan
Barani Krishnan Feb 18, 2021 12:39PM ET
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KL CI, read the story properly before you comment. It says very clearly that the potential for $4 pricing only there if more supply shocks come out of this. Do not attempt to sensationalize your own response by throwing buzz words like "Reddit" here. The people quoted in this story have used much thought processes to contribute to this article;  they are professionals with years of experience tracking the natural gas market. They are not your typical retail investors who bask in hype. Also be courteous when you comment, and more importantly, READ first. It will help a lot if you do a little thinking before firing. Thank you.
KC Cl
KC Cl Feb 18, 2021 12:39PM ET
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Barani Krishnan  - Look at your own headline, which I realize maybe you didn't write, but someone did - "Natural Gas Seen Nearing $4 If More Shocks After Texas Deep-Freeze"... I generally like your articles and respect you, and I've made positive comments on your other articles, but this is hype, not reality...
Barani Krishnan
Barani Krishnan Feb 18, 2021 12:39PM ET
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KC Cl  No offense meant, though the way you came out from left field with the Reddit remark reminded me of the trolls I have to handle on this site daily. I think the headline "Natural Gas Seen Nearing $4 If More Shocks After Texas Deep-Freeze" captures succinctly what lies ahead. Do you seriously think a few more major storms with the storage levels we have now will not bring Henry Hub to between $3.70 and $3.90? That to me is very possible and that's what the story articulates. Yet, I make it very clear that without such weather events, at current pricing, another 25% hike is a "big ask". It's all there. But as I told Robert Flores above, it's the challenge of the writer in capturing the most interesting element in the story -- and that's what I have done too, and responsibly. Hope that explains and apologies for any consternation caused in my earlier reply.
KC Cl
KC Cl Feb 18, 2021 12:39PM ET
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Barani Krishnan  - Thank you for your reply, no I'm not a troll, but with all the hoopla about GameStop and others, maybe I'm a bit sensitive about what I view as hype...my apologies if I offended you. You're my favorite analyst/writer on this website. I don't see any spring contract going to $4, but I guess you never know.  Take care.
Barani Krishnan
Barani Krishnan Feb 18, 2021 12:39PM ET
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KC Cl  Thanks for the kind words, KC CI. We never know, as you rightly said. Ha ha ... Take care, and stay safe, mate!
Barani Krishnan
Barani Krishnan Feb 18, 2021 10:31AM ET
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237 bcf is the draw, below expectations. We could come off the highs on HH.
John Brannon
John Brannon Feb 18, 2021 10:00AM ET
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A couple of days ago my high temp was 8 F, just a bit east of Dallas. This coming Wednesday the current forecast high is 69 F - though like every forecast, beyond tomorrow is certainly subject to change...
Barani Krishnan
Barani Krishnan Feb 18, 2021 10:00AM ET
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Yes, John. That's what we have here, some lack of clarity in the GFS models. Also, NatGasWeather says a thaw coming. Question really is how quick Texas gets back on its feet. If LNG exports start again, it means we are definitely out of the worst.
John Brannon
John Brannon Feb 18, 2021 10:00AM ET
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Barani Krishnan  As a roughneck working through college and spending about a decade in Midland, I believe the oil and gas industry is as resilient as can be. My speculation is that as soon as the temps improve you'll see a quick return. But I have been terribly wrong before when speculating...  :)
Barani Krishnan
Barani Krishnan Feb 18, 2021 10:00AM ET
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John Brannon  Really respect your wealth of "real" knowledge, mate. Nothing beats the experience of a hand on the field. Yet, unfortunately, as you concede, financial markets are crazy in their way of pricing of real assets. I think shale is the most incredible energy story of a generation. I believe in its resilience and that it will come back in an appreciable way to balance the energy mix with greens.
Matt Novakovich
Matt Novakovich Feb 18, 2021 9:32AM ET
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how's oil doing?
Barani Krishnan
Barani Krishnan Feb 18, 2021 9:32AM ET
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Eero Rintala
Eero Rintala Feb 18, 2021 6:30AM ET
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if gas line in texas was freeze, does that increase or decrease the usage? usage should less even if there was huge need for gas?
Barani Krishnan
Barani Krishnan Feb 18, 2021 6:30AM ET
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Usage, of course, goes up because of the intense heating required in Texas and the mid-Continental area now due to this deep-freeze. Add to that a significant drop in production, and you have a cocktail of higher physical to futures prices, as you're seeing now.
Eero Rintala
Eero Rintala Feb 18, 2021 6:30AM ET
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how you see iae report if gas line was frozen and people couldn't use so much gas as needed? if there was higher demand now and no gas available now price is higher now and should drop back to 3 dollars
Barani Krishnan
Barani Krishnan Feb 18, 2021 6:30AM ET
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Eero Rintala  Today's price action will depend on the draw number. The expectation is that we'll get 252 bcf or more. If it's below that, then some of the price upside will come off. It will probably remain supported above $3, but even that will be challenged if the weather thaws in coming days and the Texas situation is remedied steadily. The possibility for $4 pricing is only there if more supply shocks occur from storms like this. That's exactly what the headline and upper part of the story says. You can find the reference to the expected thaw in the weather lower in the story.
 
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