Natural Gas: Oversold Maybe, but What’s Storage and Output Saying?

A near 25% plunge over five days naturally makes any market feel oversold, and natural gas is no exception. 

Yet, as one of the commodity sector’s most volatile components rose 5% Wednesday on the combination of a so-called technical relief rally and cold weather forecasts, one couldn’t help but ask: “What’s storage and output saying, natty?”

And there’s reason to ask. Ever since the runaway rally in natty — traders’ moniker for natural gas — began almost a year ago, fears of an inventory and production squeeze have been the biggest driver. 

Back on Feb. 23, the US government’s weekly gas storage report showed for the first time in a year a realized withdrawal value below the five-year average – testimony of the strength of the sustained cold during the early part of the year.

As of last week, though, US gas storage stood at just around 3.6 trillion cubic feet, not much different from end-2021 levels.

Dry gas production, meanwhile, reached all-time highs of 102 billion cubic feet per day, up 2.0-3.0 billion cubic feet daily from two months earlier.

 Source: Gelber & Associates

The supply-demand dichotomy should logically see gas trading in the negative for the year. Yet, ahead of Thursday’s opening in New York, gas futures on the Henry Hub were up 57% for 2022, hovering at just under $5.90 per thermal unit.

Admittedly, the premium was just a third of the 159% when Henry Hub’s front-month settled at $9.647 on Aug. 22, after peaking at $10. But the cold weather forecasts holding up the market currently weren’t exactly foolproof either, say those familiar with the game.

NatGasWeather was one of those raising the caution, with the forecaster citing the multiple instances where the temperature outlook eventually trended warmer after once being predicted to be significantly colder.

As of Wednesday, weather models reported by naturalgasintel.com showed overnight lows plunging below zero across most of the northern half of the country during the Dec. 16-21 period. The southern United States also could see overnight temperatures slide into the 20s and 30s Fahrenheit.

Forecaster Space City Weather said in a blog by naturalgasintel.com:

“This is notable, considering daytime highs on Tuesday in Houston reached 85 degrees, breaking the previous record of 81 set in 1999. Even more shocking, it snowed on the same day in 2017.”

Yet, as the blog reasoned, other factors might withhold gas back from staging an outsized rally. A much warmer-than-normal pattern in the first half of December has done significant damage to gas prices despite the increased likelihood of a mid-December cold snap, NatGasWeather said.

The span of mild weather and resulting light demand has significantly padded storage inventories before the peak winter months, which could limit a price rally. After falling more than 350 billion cubic feet, or bcf, below the five-year average at the end of summer, gas inventories are poised to flip back to a surplus in the next couple of weeks, NatGasWeather said.

Ahead of Thursday’s inventory report by the Energy Information Administration, or EIA, a Reuters poll showed on Wednesday that US utilities likely pulled a much smaller-than-usual 31 bcf of natural gas from storage last week.

That withdrawal for the week ended Dec. 2 compares with a withdrawal of 59 bcf during the same week a year ago and a five-year (2017-2021) average decrease of 49 bcf. In the week ended Nov. 25, utilities withdrew 81 bcf of gas to storage.

The forecast for the week ended Dec. 2 would cut stockpiles to 3.452 trillion cubic feet, or tcf — about 1.7% below the same week a year ago and 1.9% below the five-year average.

As of Nov. 25, total working gas in storage stood at 3.483 tcf, which was 89 Bcf below year-earlier levels and 86 Bcf below the five-year average. Dry gas production has remained steady, hovering between 100 bcf and 102 bcf daily.

Alan Lammey, analyst at Houston-based gas markets consultancy Gelber & Associates, said in an email to the firm’s clients on Wednesday:

“However, this may change if the impending Arctic blast, which is being touted by the European (ECMWF) weather forecast model (and other models) plunges as low as the Gulf Coast comes to fruition.” 

The sheer intensity of the predicted freezing temperatures could cause a rash of widespread well freeze-offs if the magnitude of the cold verifies, Lammey said.

“If it does, wells in Oklahoma, New Mexico, Texas, and Louisiana could be dealing with freezing temperature operational issues, which would take a sizable bite out of production volumes.”

Aside from the warmth that’s helped to lower demand, robust production has aided the steady improvement in supplies, the naturalgasintel blog said.
Lower 48 dry gas output has hit 102 bcf daily in recent months, with most daily declines chalked up to maintenance events rather than a structural shift in production.

On Wednesday, for example, El Paso Natural Gas Pipeline declared a force majeure at two constraint points along its system. This was on top of the work already underway downstream on Line 1600.

East Tennessee Natural Gas LLC also declared a force majeure on the Boyd's Creek Compressor Station along the 3300 Line to complete emergent repairs. Meanwhile, Tennessee Gas Pipeline announced a force majeure impacting flows in Libertyville, NJ.

Heading into Thursday’s trading session, all attention will be on whether the forecast heating degree days or HDDs, for last week will hold up.

HDDs, which are used to estimate demand to heat homes and businesses, measure the number of degrees a day’s average temperature is below 65 Fahrenheit (18 Celsius). There were around 142 HDDs last week, lower than the 30-year normal of 146 HDDs for the period, according to Reuters-associated data provider Refinitiv.

If the forecast HDDs come through, “there’s potential for bulls to try to squeeze bears to $6,” NatGasWeather said.

Technical charts appeared to be pointing in the same direction, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. “The current momentum, if unbroken, could see a move toward $6.22 and an eventual retest of the 50-week EMA of $6.38,” said Dixit, referring to the Exponential Moving Average.

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.