Energy & precious metals - weekly review and outlook

By Barani Krishnan

Investing.com - Even John Arnold, the first trader to make billions off the volatility in natural gas, might be stunned with what’s happened with the heating fuel’s prices in just over a month.

From a December 1 peak above $7 per mmBtu, or million metric British thermal units, the front-month gas contract on the New York Mercantile Exchange’s Henry Hub hit a 19-month low of $3.417 on Friday, settling down 52% from that peak six weeks ago. Prior to that, gas hit a 14-year high of $10 in August.

Arnold, who started at Enron and exited that energy trading firm just before it blew up in a gigantic accounting fraud, formed Centaurus in 2002, a hedge fund that ran as much as $5 billion at one point in natural gas.

Over the next decade, he made so much money trading natural gas - reports say about $3 billion - as the market plunged from a record high above $15 per mmBtu in December 2005 to around $6 by September 2006, that he was grilled at a congressional hearing, in the aftermath of the 2008/9 financial crisis. 

Since retiring in 2012 at the age of 38, Arnold has barely commented on the gas market, staying true to his cause as a philanthropist and as his Twitter account says “eternally fighting status quo bias”.

While Arnold had seen the greatest peaks in gas prices in his time, the market’s volatility then seemed a little more measured than now. 

Point in case: It took nine months for that December 2005 record high of above $15 to achieve a 60% swing-down to around $6 by September 2006. Compared to that, the Henry Hub lost 65% from mid-August 2022 to below $3.50 by mid-January this year: a plunge that only took five months. In fact, from above $7 in December, the market dove 52% in just six weeks.

After explosive upward price action for most of 2022 from weather extremities and a supply squeeze caused by political and other disruptions to Russian gas output in the aftermath of the Ukraine invasion, natural gas futures suddenly collapsed last month. The change has been attributed primarily to unseasonably warm winter temperatures that have left both the U.S. and European heating markets sufficiently supplied.

Friday’s leg lower on the Henry Hub came after the Energy Information Administration reported an 11-bcf (billion cubic feet) build in gas storage for the week ended Jan. 6. It was the first ever gas storage build during a January month.

The increase in gas inventories, which came during what is being described as the warmest start to a winter in 20 years, was at the higher end of forecasts by some industry analysts, who expected a build of under 10 bcf last week. Some 14 analysts polled by Reuters had, meanwhile, predicted a draw of 15 bcf on the average from storage last week.

Exports of LNG, or liquefied natural gas, have also been tamped down since June with the shutdown of the Freeport liquefaction facility in Texas. The Freeport outage has idled about 2 bcf of gas per day, or a cumulative 60 bcf a month. That is independent of what’s happening on the weather front.

“Until there are better agreements among all the significant weather forecast models on the February outlook, the gas market will likely view any winter outbreaks with skepticism,” Houston-based energy trading consultancy Gelber&Associates said in a note on Friday to its clients in natural gas.

Some readers might actually wonder if the pivot toward greater cold is already happening. Today’s temperatures, for instance, are among the coldest for this year, dropping to 29 degrees Fahrenheit (-1.7 Celsius) in New York. Gelber said “early-bird market estimates” for next week’s gas storage data is a build between 69 and 75 bcf for the week ended Jan. 13.

Some contend that the plunge in gas prices has nothing to do with fundamentals but more of a “collusion or price fixing” by big hedge fund managers. 

Among the reader feedback I got this week was that the weather was colder in Canada, and the Northern and Eastern United States versus the moderate temperatures experienced elsewhere on the continent. I was told the current pricing was not sustainable as it was pretty much at break-even point with production costs. Any lower the market goes, supply will cease, was the warning I was given. Also, short sellers need higher prices to initiate their shorts and prices will soon be pushed upwards again, was what I heard.

My response was that gas was already overpriced for months, with inventories trending flat year-on-year even as the Henry Hub traded twice higher. As December dawned, it became obvious that the so-called storage squeeze was not going to materialize and Europe wasn't so much at Vladimir Putin's mercy (it was the other way round, actually; the Russian president was at the mercy of the weather gods). Thus, the market collapse of the past six weeks.

If indeed, “collusion or price fixing” had brought the market down, then the higher-and-higher prices leading to the $10 peak of August had little in the way of fundamentals too — except perhaps Putin’s ominous voice.

Natural Gas: Market Settlements and Activity 

Henry Hub’s front-month February gas contract did a final trade at $3.481 per mmBtu, after officially settling Friday’s session at $3.419 - down 27.60 cents, or 7.5%, on the day. February gas earlier hit a session bottom at $3.417 - its lowest since June 25, 2021.

February gas rose a combined 1.5% on Wednesday and Thursday before ending the week down 8%. Cumulatively, warm winter weather has erased 52% of the market’s value over just six weeks.

Oil: Market Settlements and Activity 

The softening inflation game in the United States is helping oil bulls out, though rising crude prices on their own might ultimately lead to higher inflation.

New York-traded WTI, or West Texas Intermediate, crude for February delivery did a final trade of $80.07 on Friday, after settling the official session up $1.47, or 1.9%, at $79.86 per barrel, following a session high at $79.85. The U.S. crude benchmark rose 8.4% gain on the week, completely erasing losses from a week ago.

London-traded Brent crude for March delivery did a final trade of $85.49 on Friday, after settling the session at $85.28, up $1.25, or 1.5%, on the day. The intraday peak for Brent was $85.34. For the week, the global crude benchmark gained 8.5%, making up for all of the previous week's drop, like WTI.

Inflation, as indicated by the Consumer Price Index, or CPI, rose by 6.5% in the 12 months to December, the Labor Department said Thursday. It was the slowest annual advance for the CPI since October 2021 and indicated smaller rate hikes ahead by the Federal Reserve, which raised rates aggressively last year to curb price pressures. 

Adding to the Labor Department data, the University of Michigan's closely-watched survey of consumers said on Friday that year-ahead inflation expectations among Americans has fallen for a fourth straight month in January, dipping to 4.0% from 4.4% in December. It was the lowest reading for price pressures since April 2021, the survey said.

The lower inflation readings are bolstering expectations that the Federal Reserve will keep to smaller rate hikes this year which would greatly assist businesses in the country, after the aggressive increases last year that sent tremors across markets. Those expectations have bolstered risk appetite in most forms this week, including in oil.

Gold: Market Settlements and Activity 

Gold neared a nine-month high on Friday, approaching the key $1,950-an-ounce resistance, as softening U.S. inflation and rate hike expectations boosted contrarian safe-haven trades.

Gold for February delivery on New York’s Comex did a final trade at $1,923.35 an ounce, after officially settling the session at $1,921.70 - up $22.90, or 1.2%, on the day. Its session high of $1,925.25 was the loftiest for a front-month contract in Comex gold since the April 25 peak of $1,935.50.

U.S. gold futures contracts have risen 5% since 2023 began, extending its near 4% gain from December and 7% from November.

The spot price of gold, more closely followed than futures by some traders, settled at $1,920.13 - up $23.22, or 1.2%, on the day. Spot gold’s intraday peak was $1,921.97- also the highest since April 25.

Gold has rallied over the past three months as receding inflation drove bond yields and the dollar lower on expectations that the Federal Reserve will be a lot less aggressive with rate hikes this year versus 2022, and might even wrap its monetary tightening well before the end of 2023.

“Gold prices are rising as Wall Street grows confident that the Fed is almost done with raising rates,” said Ed Moya, analyst at online trading platform OANDA. “Non-interest bearing gold is loving the slide in bond yields and that could continue as earnings come in softer-than-expected.”

The yield on the benchmark 10-Year U.S. Treasury note was at 3.49% on Friday, versus the October peak of 4.34%. The Dollar Index, which pits the greenback against six competing major currencies that include the euro and yen, steadied at just above 102, after tumbling from September’s highs of above 107.

Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.