The U.S. natural gas trade has just gotten a lot trickier.
It will not be another “polar vortex” year, say some traders. Correspondingly, there have been a lot less storage withdrawals for heating than last year.
Nevertheless, the weather is freezing, which creates the need for winter pricing risks.
The question is: what would be the appropriate premium?
Storage Draws Both Bullish And Bearish
Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, outlined gas traders’ dilemma in a note this week:
“It appears to me that the market is 100% focused on weather with some focus on the data as well, as the last few of EIA draws have been volatile and unexpected on both the bearish and bullish side of the market.”
In its latest weekly dataset issued on Thursday, the EIA, or Energy Information Administration, reported a drawdown of 81 billion cubic feet from storage last week, slightly above expectations but still much lower than the 218 bcf five-year average decrease.
The storage deficit that was under 5-year average levels has been more than halved since mid-December, and now stands at 327 bcf.
Thursday’s underwhelming EIA draw data also allowed gas stockpiles to climb back into the five-year historical range for the first time since July.
Variable Weather Forecasts Add To Volatility
Dan Myers, analyst at Gelber & Associates, a natural gas consultancy in Houston, Texas, said variable weather forecasts continued to contribute to higher volatility in gas prices, and the latest EIA storage report was “merely adding to the noise." He said:
“Total storage was bound to return to the five-year range at some point this season as winter was unlikely to match the depletion rate in the frigid Polar Vortex winter of 2013-14. It is more notable that storage should stay briefly above last year’s levels in next week’s report.”
“However, this year is a much different story as the largest storage withdrawals are still to come in late January and February, even if weather models can’t yet work out the details.”
The 2013-14 polar vortex was an extreme weather event that covered most of North America and extended through the late winter months of that cold season.
Record-low temperatures were seen during long stretches of that winter, when U.S. states such as Wisconsin and Minnesota saw readings of between 18 °F (−28 °C) and −37 °F (−38 °C). Even Houston, the blazing capital of Texas, saw temperatures falling to 21 °F (−6 °C) at one point. Gas prices rallied from $4.53 per million British thermal units in December 2013 to a peak of nearly $6.50 per mmBtu in February 2014.
Wildest Price Swing Since November
This week, in its wildest price swing since November, the front-month gas contract on the New York Mercantile Exchange jumped 16 percent on Monday in response to traders’ bewilderment on gas pricing risks, as the coldest stretch since the start of the 2018-19 winter got underway with temperatures in the low 20 °F levels.
Since then, volatility has tamped down to daily fluctuations of 1 to 3 percent as the market became more familiar with the temperature patterns.
While the market seemed well supported above the key $3 per million British thermal units level with Thursday’s settlement of $3.424 for the front-month gas contract on NYMEX, there weren’t many supportive factors to push prices much higher.
Dominick Chirichella, director of risk and trading at the DTN-owned Energy Management Institute in New York, noted that current weather conditions called for “below normal temperatures over the eastern 80 percent of the U.S.” Said Chirichella:
“The call on Nat-Gas heating-related demand will be above normal this time of year.”
But he also reckoned that, with half of the official winter heating season already in history books,
“The probability of a significant upside price rally will diminish, unless the cold weather remains in play for an extended period.”