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After overdrive into freeze territory, weather signals turn bearish somewhat
Natgas’ front-month tumbles 7% following 5-day rally of almost 30%
Gas bulls expect another round of rally from supply freeze-offs
Are we seriously looking at a polar vortex this December that could be as bad as in 2014? That’s what some weather forecasters had been alluding to, explaining the unbroken week-long rally in natural gas that lasted through Tuesday.
But a tempering of that outlook on Wednesday, amid the notion that the weather could actually be less frigid than thought, broke the back of that rally.
Of course, natty — as it’s called in the trade — wouldn’t be natty if not for its volatility. On that score, Wednesday’s 7% tumble in gas futures on the New York Mercantile Exchange’s Henry Hub was considered “fair game,” coming after a near 30% jump over the past five sessions.
The hub’s front-month contract had gone from a six-week low of $5.34 per million British thermal units, or mmBtu, on Dec. 6 to a two-week high of $7.10 on Dec. 13.
Still, the profit-taking and correction that came on the back of the less-threatening weather outlook were jarring to some.
Alan Lammey, an analyst at Houston-based gas markets consultancy Gelber & Associates, said in an email to the firm’s clients seen by Investing.com on Wednesday:
“With only a little over a week to go before a massive polar vortex plunges into the U.S. and overspreads most of the nation with bitter cold, ice, and snow.”
Natural gas for January delivery on the New York Mercantile Exchange’s Henry Hub settled Wednesday’s trade down 50.5 cents, or 7.3%, at $6.43 per mmBtu.
Prior to that, the benchmark gas contract had gone from a six-week low of $5.34 on Dec. 6 to a two-week high of $7.10 on Dec. 13.
According to Lammey, Wednesday’s market reversal was notable because “the oncoming Arctic winter blast was likely to be the coldest for a December since 2010”.
The last polar vortex occurred in 2014. Weather records show similar cold outbreaks prior to that, including several notable freezes in 1977, 1982, 1985, and 1989.
Prior to Wednesday, the U.S. Global Forecast System, or GFS, and the European weather model ECMWF had persistently shown the potential for a near-record cold period to last through the end of 2022.
That led hedge funds on the market to vigorously defend the $7 pricing for the Henry Hub’s front-month during the five-day rally, though gas bulls still couldn’t get past the $7.10 mark.
In the Gelber email, Lammey humorously referred to it as the “kind of price defense [that] can be equated to when an opposing basketball player blocks a beautiful slam dunk set-up and opportunity.”
“The result was that gas futures couldn’t break through to the next higher level in the mid-$7.20s to attract more solid bids and instigate a short-covering rally.”
But the rally unraveled as weather models turned warmer the past 24 hours.
Weather changes aside, some gas bears were betting on gas storage inventories to be adequate through the year-end despite the looming Arctic outbreak. They even contend that some year-over-year premium is warranted in front of a returning storage deficit, stout export demand for LNG, or liquefied natural gas, and the potential for fuel switching to gas due to high coal prices.
Ahead of Thursday’s weekly gas storage update from the Energy Information Administration, or EIA, analysts tracked by Investing.com expect U.S. utilities to have pulled 45 billion cubic feet from stockpiles during the week ended Dec. 9, versus a 21-bcf drawdown in the prior week to Dec. 2.
Gas bulls also had their own take on why another rally or two might be in store before the year ends.
EBW Analytics Group analyst Eli Rubin said in comments carried by naturalgasintel.com:
“Despite modest erosion in the magnitude of cold, however, the broad pattern pointing to hefty increases in weather-driven demand later this month remains intact.
Supply freeze-offs could compound market tightness. While downward pressure remains likely on a seasonal basis, the coming cold blast through the end of the year could still prompt another run higher first.”
In terms of supply, Wood Mackenzie pipeline estimates early Wednesday showed a roughly 2.0-billion cubic feet, or bcf. per day decline in domestic production. That put the total output at around 98.2 bcf per day. Just a few weeks ago, production stood at a high above 102 bcf daily.
Wood Mackenzie analyst Laura Munder attributed the lower output readings to pipeline maintenance and operational issues, advising clients to expect revisions for Thursday’s estimate.
Estimated production declines included roughly 635 MMcf/d in North Louisiana, around 415 MMcf/d in the New Mexico portion of the Permian Basin, and around 320 MMcf/d in Oklahoma, according to Munder.
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.