In economic terminology, a V-shaped recovery occurs when a boom period matches the intensity and velocity of the preceding crash, with the two happening almost back to back.
That’s the case with US natural gas production now, which is moving at such an alarming pace that it could turn a bull market into a bear.
With just two sessions left to this week, gas futures on New York’s Henry Hub showed a week-to-date slump of almost 12% at Thursday’s open, adding to the previous week’s drop of 1.5%. A week before that, the market was up 16%.
Natural Gas Daily
While natural gas wouldn’t be natural gas without heart-stopping price swings, what’s really phenomenal are the production changes driving these moves.
Those tracking the shifts point to an uncanny V-shaped recovery in output as production losses from the freezing weather and storms earlier this month are more than compensated by new gas arriving on the back of warmer temperatures.
Dan Myers, analyst at Houston-based gas markets consultancy Gelber & Associates, cited the phenomenon in a note to the company’s clients:
“Returning production from freeze-offs that occurred at the height of the storm is also responsible for the downward pressure on the front-month and is likely the primary driver behind today’s 5% decrease,” Myers wrote, referring to Wednesday’s market slide.
“Initial production reports imply that U.S. natural gas production is approaching 93 bcf/d in a manner similar to a V-shaped recovery, after being observed as low as 88 bcf/d prior in the week.”
The additional bcf/d or billion cubic feet daily of gas production cited by Myers isn’t expected to immediately impact what the US Energy Information Administration (EIA) will be reporting on Thursday as gas storage numbers for the week ending Feb 4.
For a fourth week in a row, the EIA is expected to report a blockbuster drawdown of more than 200 bcf from gas storage as Americans turned on the heat full blast in their homes and elsewhere amid freezing temperatures that gripped the country East to West.
Natural Gas Storage
Source: Gelber & Associates
The draw consensus for the Feb 4 week among analysts tracked by Investing.com was 222 bcf.
That would compare with the 174 bcf withdrawal during the same week a year ago and a five-year (2017-2021) average withdrawal of about 150 bcf.
In the prior week to Jan. 28, utilities withdrew 268 bcf of gas from storage, the biggest weekly withdrawal since last year’s February freeze.
If the analysts tracked by Investing.com are accurate in their estimates about the storage draws that took place last week, then total gas in inventory is expected to have declined to 2.101 trillion cubic feet (tcf), about 9.3% lower than the five-year average and 17.3% below year-ago levels.
According to data provider Refinitiv, the weather was colder than usual last week, with 212 heating degree days (HDDs), compared with a 30-year normal of 190 HDDs for the period.
HDDs, used to estimate demand to heat homes and businesses, measure the number of degrees a day’s average temperature is below 65 degrees Fahrenheit (18 degrees Celsius).
While all that was good for last week, it’s the forward expectations that will matter for gas prices trading on the Henry Hub.
The bearish changes to weather forecasts since the start of this week have slashed 9 bcf of additional natural gas demand over the next two weeks, those in the know say.
And as the United States heads into the late-winter calendar of mid-February and beyond, analysts are discounting the possibility of further freezing conditions like last year’s Storm Uri recurring.
Uri, which struck in February 2021, was the biggest US winter and ice storm since the 2014 Polar Vortex. Uri had widespread impact across the United States, Northern Mexico, and parts of Canada.
The storm wreaked havoc, particularly in Texas, last year, triggering blackouts, partly freezing the Permian oil and gas basin and killing more than 200 people. There had been fears initially last week of a repeat of such conditions in Texas, although that possibility looks more remote now.
The more benign conditions for winter 2022 are beginning to weigh on gas prices now, pulling down the Henry Hub from peaks above $5 per thermal unit last week to Wednesday’s low of $3.98.
“Early forecasts indicate that we will not be able to measure up to the 2013/14 season, unless forecasts for late February and March dramatically factor in additional cold.”
“For now, the 21/22 winter season is still within the five-year range, though it will test the lower bound of the range in the coming weeks.”
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.