Updated weather forecasts pointed to ongoing mild conditions that would generate a lack of heating demand through the first half of December. The outlook drove January natural gas futures another leg lower, even as the market eyes what could be the first triple-digit withdrawal from inventories of the season in data due out Thursday.
At A Glance:
- Bearish weather dominates
- 106 Bcf storage withdrawal expected
- Cash markets mostly higher
Nymex January futures closed the Monday regular session down 12.0 cents at $2.694/MMBtu. The front-month contract opened the fresh trading week at $2.728, well off the Dec. 1 settlement of $2.814. With little support, the contract managed only a modest lift to an intraday high at $2.752 but finished off the $2.649 intraday low.
Meanwhile, the predominant pre-weekend downtrend reversed in the physical natural gas market. NGI’s National Spot Price Avg. was 22.5 cents higher day/day at $2.855.
EBW Analytics Group analyst Eli Rubin expected additional downsides in natural gas futures. He pointed out the latest Commodity Futures Trading Commission Commitments of Traders report on Dec. 1 that showed speculator positions flipped to net short week-over-week.
However, Rubin warned that selling pressure may lessen with outstanding short exposure at the highest level since February, when the front-month contract briefly tested below $2.000.
Rubin said, “The risk of a short squeeze-driven rally is high if bullish catalysts emerge.”
Storage Support
Futures could be spurred higher on Thursday when the U.S. Energy Information Administration (EIA) releases the latest storage data for the week ending Dec. 1.
Inventories stood at 3,836 Bcf, 303 Bcf above the five-year average after the EIA reported a 10 Bcf injection into natural gas inventories for the week of Nov. 24. That build was above the five-year average withdrawal of 44 Bcf and the year-earlier drawdown of 80 Bcf.
“However, frosty temperatures over the United States last week will drop surpluses to near 250 Bcf after this week’s EIA report is accounted for,” according to NatGasWeather.
The range of preliminary expectations for the storage report due out at 10:30 a.m. ET Thursday spanned withdrawals from 16 Bcf to 134 Bcf.
NGI modeled a 106 Bcf withdrawal. The drawdown would compare bullishly against the 30 Bcf year-ago and 48 Bcf five-year average withdrawals.
But a tightening of supply could be short-lived, as a return to warmer-than-average temperatures in the next two weeks would result in lighter than average demand to increase surpluses towards 325 Bcf, said NatGasWeather.
The firm's latest weather outlook through the upcoming 15 days showed seven heating-degree days added due to colder weather trending through the United States early next week. Still, NatGasWeather said most of the next 15 days are “quite bearish.”
The forecasts called for numerous weather systems spanning the country with little cold air accompanying them. Highs are expected mainly in the mid-30s to 50s over northern areas and 50s to 70s over southern portions of the United States, which would keep national demand light.
The firm said if colder weather fails to arrive in the second half of December, surpluses would increase to more than 350 Bcf and create a “woefully oversupplied environment” in the New Year.
“Even as we expect to see a triple-digit withdrawal this week, the market is convinced that unless we see a much colder than normal winter, we’re going to end up with a glut of supply,” Price Futures Group senior analyst Phil Flynn said.
Production An Anchor
Flynn told NGI, “Natural gas is tipping, mainly because production continues to be strong in the expectations of the cold blast to burn off.”
EBW’s Rubin agreed that production remains robust to start December. The analyst said pipeline nominations suggested another Bakken supply record over the weekend.
“Although production growth may ebb slightly into mid-winter as seasonal headwinds emerge, it may be difficult to shake an oversupplied long-term fundamental outlook unless production ultimately declines,” Rubin said.
Wood Mackenzie put production on Monday at 104.6 Bcf/d. Meanwhile, LNG demand at 14.1 Bcf/d offered little upside support.
Flynn noted that despite a colder start to winter in Europe and Asia, “We’re already maxed out on LNG exports, so that’s not going to matter at this point.” He said, “Still, if that cold weather hits the United States, it could change the dynamic of this market.”
Cash Reverses Higher
Henry Hub spot prices hit $2.60 over the weekend despite mild weather but tripped 5.0 cents from Friday to a $2.545 average Monday.
Gelber & Associates analysts said that residential/commercial (res/comm) sector demand remains volatile day-to-day, having increased by a reported 3 Bcf/d from Sunday to 33.1 Bcf/d Monday.
“But the general trend continues to show that heating demand is increasing slower than usual for this time of the year,” the analysts said.
With the western half of the United States expected to see mild weather with highs in the 50s to 70s, prices at hubs in California and the Rocky Mountains followed the Henry Hub lower.
Posting the sharpest regional loss, the California Regional Avg. sank 22.0 cents from Friday to $4.340. Malin tumbled 53.0 cents to an average of $4.200 and helped the regional average retreat.
In the Rockies, Northwest Sumas gave back a sizable 76.5 cents to an average of $4.000. That helped the Rocky Mountain Regional Avg. down 16.0 cents to $3.070.
Leading the upside, Algonquin Citygate, which serves the Boston area where temperatures are forecasted to tumble from highs in the low 50s on Monday to the 30s on Tuesday and Wednesday, added $3.215 to an average of $5.715. That helped the Northeast Regional Avg. to gain $1.595 to $4.285.
Transcontinental Gas Pipeline Company LLC (Transco) began maintenance on Dec. 5 that was expected to cut southbound flow through Dec. 8.
That helped prop up prices at Southeast delivery hubs, including Transco Zone 5, where deals spanned $2.850 to $3.000 and were up 35.5 cents on average to $2.975.
