The winter rally in US natural gas may have ended even before the winter got going, and the market could struggle to return to $3 levels.
Those who witnessed the jaw-dropping run-up in gas prices to near $5 levels during the past six weeks—and subsequent retrenchments of up to 20 percent in day—may want to preserve that memory.
If the front-month February gas contract on the New York Mercantile Exchange settles Friday’s trade at or around $2.93 per million metric British thermal units (mmBtu), it would be the fifth straight week of losses for the market, to the combined tune of 43 percent.
Those losses are partly because winter 2018/19, which began on December 22, has had fewer cold days compared to the extraordinary chill experienced during the autumn season that ran since September 23.
No Real Cold Seen Till Mid-Jan
And analysts such as Dominick Chirichella of the Energy Management Institute in New York and Dan Myers of Gelber Associates in Houston expect the weather to remain unseasonably warm for another two weeks at least.
That means lighter demand for gas-powered heating and fewer drawdowns of the fuel from underground storage showing up in weekly inventory data due from the US Energy Information Administration (EIA) over the next fortnight.
In fact, the lower draw trend could begin with the EIA data to be issued at 11:00 AM (16:00 GMT) today, where just about 47 billion cubic feet (bcf) is expected to have been used up from last week’s storage compared with the year-ago drawdown of 193 bcf.
Gas reserves began the 2018/19 cold season at below the 5-year norm, thanks first to strong summer heat, then by the autumn chill, which kept air-conditioners and heaters running on overdrive since June. But with gas production remaining at record highs, the storage deficit has been dwindling and could disappear, if cold weather remains absent for long.
Reuters reports that there were 160 heating degree days (HDDs) last week, compared with 232 HDDs in the same week a year ago and the 30-year norm of 195 HDDs for this period. HDDs account for the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 degrees Celsius). The measure is used to estimate demand to heat homes and businesses.
Weak Immediate Demand For Gas-Powered Heating
Analyst Chirichella of the EMI says temperature forecasts are expected to remain above normal for all of the United States until mid- January or longer, keeping gas-powered heating demand lower than usual.
He adds:
“Based on the latest short-term weather projections, the inventory withdrawals are likely to underperform the historical data for the next several weeks, further narrowing the inventory deficit and further reducing the probability of a strong upside surge in prices anytime soon.”
Myers of Gelber & Associates also has a weak outlook for gas demand in the near term.
In a note titled “Winter Rally Crushed”, the Houston-based said he expected NYMEX’s February gas contract to continue seeking support below $3 per mmBtu.
Myers adds:
“Plenty of winter risk remains as we enter the New Year. A flip to successive weeks of significant cold later in January will be needed to remind a now-despondent market of the low storage fears that drove it higher early in the season.”
Funds That Were Long Gas Could Turn Short
Scott Shelton, energy broker at ICAP (LON:NXGN) in Durham, North Carolina, said he expected the majority of gas-focused funds that had been bullish on the market to have liquidated their positions by now. He adds:
“The trend is clearly lower, and the issue from here is that they probably still need to get short though.”
While demand for heating may have waned, gas could have a different saving grace.
A surge in the export capacity of liquefied natural gas has boosted the demand equation for US natural gas since last year. From just around 3 bcf per day a year ago, LNG export capacity is almost at 5 bcfd now. The EIA expects it to reach nearly 9 bcfd by end of 2019, making the United States the country with the third largest LNG exporting capacity after Qatar and Australia.