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Natural Gas: Wonky Weather Sets Market On Renewed Path Of Volatility

By Investing.com (Barani Krishnan/Investing.com)CommoditiesOct 21, 2021 04:19AM ET
www.investing.com/analysis/natural-gas-wonky-weather-sets-market-on-renewed-path-of-volatility-200605807
Natural Gas: Wonky Weather Sets Market On Renewed Path Of Volatility
By Investing.com (Barani Krishnan/Investing.com)   |  Oct 21, 2021 04:19AM ET
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If you’re living somewhere in the US Northeast and have been wearing extra layers lately—or, worse, already cranking up the heat at home—this month’s natural gas price slump might have left you a little nonplussed. 

Natural Gas Daily Chart
Natural Gas Daily Chart

Last week might have been especially tough on those long gas as prices fell almost 3% despite the weekly build in gas storage reported by the US Energy Information Administration (EIA) coming in at almost 15% below forecast. 

And while the price rebounded almost 2% on both Tuesday and Wednesday, the market was trending red again at the time of writing, showing another potential weekly loss of 5%, if it fails to spring back adequately by Friday’s close. 

Since the week ended Sept. 24, gas prices have not had a positive week, with cumulative losses standing at around 8%. Truth be told, that’s not a lot, compared to swings the gas market has endured. 

Also, the spot November gas contract on the New York Mercantile Exchange’s Henry Hub is back at above $5 per mmBtu, or million metric British thermal units, after plumbing to a one-month low below $4.83 earlier this week.

Yet, if one were to peruse weather forecasts and the potential for burns versus injections over the coming weeks, the market’s behavior may be perfectly justified, say analysts crunching numbers at the various energy consultancies across the country.

“Weather forecasts are holding steady today and continue to project that well above-normal temperatures will dominate much of the country east of the Rockies for the next two weeks,” said Dan Myers of Houston-based Gelber & Associates. 

“Early hints of normal and cooler weather (and stronger heating demand) are only beginning to crop up at the tail end of the forecast, which suggests that healthy storage injections will continue into at least the first week of November.”

Natural Gas Storage
Natural Gas Storage
Source: Gelber & Associates

Gelber & Associates are predicting that there was a 94 bcf, or billion cubic feet, injection into natural gas storage last week—much stronger than the five-year (2016-2020) average build of 69 bcf for the week.

The consensus among analysts tracked by Investing.com is that at 10:30 AM today (14:30 GMT) the EIA will report a 90-bcf injection for last week versus a 49-bcf build during the same week a year ago.

In the prior week ending Oct. 8, utilities injected 81 bcf of gas into storage, which was the fifth week in a row that utilities stockpiled more gas than usual. 

As aforementioned, the EIA’s last inventory report was about 15% lower than analysts’ forecast of 94 bcf. There’s a potential for such a variance again this time, although the dynamics of weather might swing the number to the favor of gas bears—meaning the build could be even larger than forecast.

If analysts’ consensus for a 90-bcf injection is on target, total gas in stockpile would stand at 3.459 tcf, or trillion cubic feet—some 4.2% below the five-year average and 11.7% below the same week a year ago.

The estimate for a higher build comes amid last week’s milder-than-normal weather that resulted in 52 total degree days (TDDs) compared with a 30-year average of 69 TDDs for the period.

TDDs, used to estimate demand to heat or cool homes and businesses, measure the number of degrees a day's average temperature is below or above 65 degrees Fahrenheit (18 degrees Celsius).

“In upcoming weeks, we project storage increases of 87 bcf, 66 bcf, and 44 bcf from weeks between Oct. 22 and Nov. 5, respectively,” said Gelber & Associates’ Myers.

“These storage builds will continue to help inventories make up significant ground on the 5-year average, before injection-season winds down in the middle of next month.”

EBW Analytics Group agrees that a potential weather shift in the Lower 48 US states remains a “critical wildcard” for gas. 

“Recent warm weather appears likely to continue into early November, but the progression of the Madden Julian Oscillation into Phases 4-5 could finally dislodge the current milder-than-normal paradigm,” naturalgasintel.com said in a report that carried EBW’s weather analysis. 

While the second week of November is likely to see remnants of warmer weather from the central US to the East Coast, cooler temperatures by mid-November could dramatically shift market sentiment, according to EBW. 

The firm noted that DTN, another weather forecaster, has cautioned that while model guidance on atmospheric drivers is fairly well aligned, temperature anomaly outcomes remain more bearish than analogs suggest is likely.

“The 16- to 30-day forecast shows heating demand nearly even with 30-year normals and 65 gas-heating degree days above year-ago levels,” EBW said.

“If it verifies, the forecast would likely arrest declines and could reinflate Nymex winter risk premiums by early to mid-November.”

The EBW analyst team also pointed out that the importance of weather is magnified with supply and demand, which are both relatively price-inelastic in the short run. With little ability to modify natural gas demand via coal-to-gas or gas-to-coal switching near current price levels, the market is particularly exposed to any weather demand shocks heading into early winter.

“Currently, market positioning suggests the need for at least modest cold, or recent declines may extend to the low-to-mid $4.00/mmBtu range,” EBW analysts said.

“Any significant cold shot before Thanksgiving, however, could return prices toward recent highs north of $6.00/mmBtu.”

With the market firmly in the grip of shoulder-season blues—where demand for heating is typically wonky in the summer-fall-winter transition—weather-independent fundamentals have seen interesting shifts in recent days that could impact coming storage injections. 

For instance, dry gas production pulled back late last week under 90 bcf daily on a variety of maintenance events in the South-Central region, although it is beginning to bounce back this week (see chart below). 

Dry Gas Production
Dry Gas Production

Source: Gelber & Associates

On the broader demand side, including for LNG, or liquefied natural gas, Mexican exports have found renewed vigor and returned to a seven-day average between 6-6.5 bcf daily.

LNG exports as a whole, while fluctuating day-to-day, are exiting the recent US maintenance period and trending to a steadier average near 11 bcf daily in preparation for winter.  

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 a position in the commodities and securities he writes about.

Natural Gas: Wonky Weather Sets Market On Renewed Path Of Volatility
 

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Natural Gas: Wonky Weather Sets Market On Renewed Path Of Volatility

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Comments (5)
Abdul Khaliq
Abdul Khaliq Oct 21, 2021 3:22PM ET
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Storage is near 5 yrs avg but why NG is not getting down
dean holden
dean holden Oct 21, 2021 12:47PM ET
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Please post some of the key data you use to generate your reports. Appreciate the article.
Md Noman
Md Noman Oct 21, 2021 9:16AM ET
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10000
Md Mejan Khan
Md Mejan Khan Oct 21, 2021 8:36AM ET
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ron king
ron king Oct 21, 2021 4:24AM ET
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where do you get your info from out of thin air? Weather does not do anything to the stock market so stop inventing these fud articles of fear.
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Barani Krishnan
Barani Krishnan Oct 21, 2021 4:24AM ET
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Jennifer Consorti  Thanks for clearing that up. What Ron King said was almost laughable.
Barani Krishnan
Barani Krishnan Oct 21, 2021 4:24AM ET
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SunilKumar Dixit  Hah! Love your sarcasm, mate. I wonder how some people end up trading or commenting about gas when they haven't a clue on what moves its prices.
Satendra Singh
Satendra Oct 21, 2021 4:24AM ET
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Dear Mr. Khaliq thanks for your regards.  I really appreciate Mr. Barani's articles.  He leads in providing best and latest factors right at the moment that could impact the price movements of Nat Gas.  I request everybody not to use bad comments for any analyst here.  Otherwise they will not come with supportive themes which help all of us to understand the upcoming moves; especially at the time of increasing volatility.  I think after the inventory announcement Nat Gas could make a shaky move from $6.129 to $4.126 till this weekly closing. I  invite you to join me at YouTube for my latest updates.  Best Wishes.
Barani Krishnan
Barani Krishnan Oct 21, 2021 4:24AM ET
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Satendra Singh  Thanks for that endorsement, mate! Hello everyone, Satendra has been doing this well before me, and I'd urge you to follow his videos as well on youtube for a broader perspective of pricing dynamics Bests to all.
Abdul Khaliq
Abdul Khaliq Oct 21, 2021 4:24AM ET
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