An interesting split has formed in the U.S. natural gas trade on how cold January could be—a debate that has given legs to the market's rebound from three-month lows, while preventing it from turning bullish enough to reach key $3 pricing.
As traders await another weekly release of gas storage data from the U.S. Energy Information Administration at 10:30 AM (15:30 GMT), futures of the fuel on the New York Mercantile Exchange’s Henry Hub point to a third straight week of gains, after tracking encouraging inventory drawdowns over the same period.
Hovering at $2.75 per mmBtu, or million metric British thermal units, Henry Hub’s front-month is up more than 8% for January, after touching three-month lows of $2.238 in December.
Yet, the $3 per mmBtu and above levels seen between October and November seem to be out of the market’s immediate grasp amid the heated debate on the cold—oxymoronic as that sounds.
Gelber & Associates, a Houston-based consultancy for natural gas, says that while the winter outlook for January had strengthened since the start of the year, the market still had to pass through a potential warming period this weekend.
Following that, a mild transition was expected into the coming week, before more frigid temperatures arrive later in the month, Gelber said.
For Gas Draws, Matching Five-Year Average Still A Struggle
It added that the market will likely ”struggle to match the five-year average in the next three storage reports, before potential for a sizable near-200 Bcf withdrawal for the week ended Jan. 29.”
For the storage report due today, Gelber is expecting a draw of 131 bcf, or billion cubic feet, for the week ended Jan. 7. That’s bearish if compared with the five-year average decline of 161 bcf for this time of year. But it’s positive if stacked up against the 91-bcf decrease seen during the same week just a year ago.
Gelber’s forecast is almost on square with the consensus draw of 130 bcf expected by natural gas analysts polled by Investing.com.
The agency’s weather outlook is also in line with that of forecaster Bespoke Weather, which says in a report published on naturalgasintel.com that it still expected “notable cold at least in the central and western” portions of the United States before January ends.
'Kicking The Can Down The Road' On The Cold
Adds Bespoke:
“This ‘kicking the can down the road’ as far as when we can finally see cold” across most of the United States “definitely has promoted skepticism in whether or not it ever does verify.”
There is reason for the skepticism.
Despite the belief that cold in the U.S. Northeast was intense last week, data showed the country’s biggest gas-fired heating region actually experienced warmer-than-usual weather, with 176 HDDs, or heating degree days.
HDDs are used to estimate demand to heat homes and businesses and measure the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 degrees Celsius).
Last week’s 176 HDDs compared with a normal of 202 HDDs for the same week over a 30-year period, data from Refinitiv showed.
For further evidence, Bespoke said GFS, or Global Forecast System for weather, extended milder trends early Wednesday for Jan. 23-27, a period during which forecasters expect frigid air to sweep down from Canada and spread across broad sections of the Lower 48 U.S. states.
Courtesy Gelber & Associates
Added Bespoke:
"While both domestic and European models still pointed to a significant cold snap, the GFS trended warmer again at the midday run, shedding expectations for the deep freeze to extend very far over the southern and eastern portions of the country."
Weather aside, even the encouraging drawdowns from storage over the past three weeks fell short of five-year averages.
If the analysts polled by Investing.com are on target with their forecast for a 130-bcf draw for last week, the decrease would cut stockpiles to 3.202 tfc, or trillion cubic feet.
That would still be 7.5% above than the five-year average and 4.3% above the same week a year ago.
LNG Still A Shining Corner Of Gas Market
But there’s another component of the natural gas market that’s staying bullish—LNG, or liquefied natural gas.
Analysts at EBW Analytics Group, noting a harsh winter blast forecast for Europe, along with a shortage of LNG tankers, said on the naturalgasintel.com report:
“The global LNG market remains on fire.”
LNG volumes had hovered near or above 11 Bcf all of last week as a brutally cold start to winter and waning domestic supply in northern Asia bolstered demand for American gas, EBW’s analysts said, adding:
“With Asian temperatures expected to moderate next week, the focus may soon shift to the European market.”
Since the start of the 2020/21 winter cycle, LNG deliveries to Europe have averaged 5 bcf per day less than year-ago levels, EBW’s analysts noted.
However, with Europe expected to face one of its coldest winters in years, they said European hub prices for gas could spike sharply amid forecasts that end-winter storage for gas on the bloc could hit as low as 1.15 tcf, or 900 bcf below year-ago levels.
Back to gas prices, Investing.com’s Daily Technical Outlook continues to show a ”Strong Buy” for Henry Hub’s front-month February contract.
Should the contract extend its upward trend, then a three-tier Fibonacci resistance is forecast, first at $2.799, then $2.827 and later at $2.872.
Should the trend turn negative, then support will likely be first at $2.709, then $2.681 and later at $2.636.
In any case, the pivot point between the two is $2.754.
As with all technical projections, we urge you to follow the calls but temper them with fundamentals—and moderation—whenever possible.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. He does not own or hold a position in the commodities or securities he writes about.