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Natural Gas Keeps Tumbling, But Switching From Coal May Limit Downside

By Investing.com (Barani Krishnan/Investing.com)CommoditiesApr 25, 2019 15:52
uk.investing.com/analysis/natural-gas-keeps-tumbling-but-switching-from-coal-may-limit-downside-200207604
Natural Gas Keeps Tumbling, But Switching From Coal May Limit Downside
By Investing.com (Barani Krishnan/Investing.com)   |  Apr 25, 2019 15:52
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Natural gas may be cheap now, but is it cheap enough for U.S. utilities to switch from coal in droves?

It’s a pertinent question as the U.S. Energy Information Administration is expected to report an inordinately large build of 91 billion cubic feet for last week’s gas inventory, due at 10:30 AM ET (14:30 GMT) today.

The gas injection for the week ending April 19—the fourth for this year since the end of storage withdrawals that transpired during the winter—came amid record gas production and warmer-than-usual spring weather that cut heating demand.

NatGas Daily Chart - Powered by TradingView
NatGas Daily Chart - Powered by TradingView

After winter heating peaked in November, gas futures on the New York Mercantile Exchange’s Henry Hub tumbled 36% in December and have fallen without a break over the past four months, accruing a year-to-date loss of 15%.

Henry Hub’s benchmark gas contract hit a near three-year low at $2.478 per million metric British thermal units last week, and is hovering at around $2.51. Investing.com’s daily technical outlook has a “Strong Sell” on the contract, pegging a bottom as low as $2.406.

With the fuel likely to get even cheaper, some analysts think that switching from the costlier coal to gas will be a no-brainer for utilities when summer cooling demand begins in late May.

If such switching gains traction, then gas prices could snap out of their downtrend and even rally, a month from now.

Scott Shelton, energy futures broker at ICAP (LON:NXGN) in Durham, North Carolina, is among those betting on the possibility of Commodity Trading Advisors, or hedge funds, turning bullish as coal-to-gas switching ramps up.

Said Shelton:

“I think prices are too cheap, and it would not surprise me if CTAs had sold 75,000 lots since the last EIA report.”

“Coal-to gas switching, with some load demand, will tighten up supply-demand balances in gas. It is a nice combination of factors to generate a rally that will be as unexpected as this selloff.”

Dominick Chirichella, director of risk and trading at the Energy Management Institute in New York, had a similar view.

Said Chirichella:

“With the weather now projected to turn decidedly warmer across most of the country, we may be getting close to a short-term price bottom.”

“Cooler-than-normal temperatures are forecast to overspread most of the northern U.S. this weekend. The below-normal temperatures are expected to continue in the northern U.S. for a few more days in the 6-10-day period, while above-normal temperatures hang on in the South.”

Last week’s weather was warmer-than-normal with 62 heating degree days (HDDs) versus a 30-year normal of 73 HDDs for the period. There were 105 HDDs in the same week a year ago.

HDDs measure the number of degrees a day's average temperature is below 65 Fahrenheit (18 Celsius) and are used to estimate demand to heat homes and businesses.

Kent Bayazitoglu, gas analyst at Gelber & Associates in Houston, said gas injections from this week onward could breach the 100 bcf mark as the weather turns progressively warm.

Said Bayazitoglu:

“Weather forecasts are hinting at more demand with heat expected in the Southeast and snow expected for parts of the Rockies.”

Yet, he didn’t expect prices to surge anytime soon. “The weather isn't bullish enough to halt the avalanche of gas to be injected.”

Natural Gas Keeps Tumbling, But Switching From Coal May Limit Downside
 

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Natural Gas Keeps Tumbling, But Switching From Coal May Limit Downside

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