Natural gas comes crashing down from high heavens after warm reset in forecasts

By Barani Krishnan

Investing.com -- After its strongest weekly gain in 2-½ years, natural gas came crashing back down from the high heavens on Monday as revised weather forecasts indicating mild temperatures ahead of spring reset expectations for the heating fuel’s price.

The most-active April gas contract on the New York Mercantile Exchange’s Henry Hub settled at $2.572 per mmBtu, or metric million British thermal units, down 43.7 cents, or 14.5%, on the day.

Just on Friday, April gas rose 24.4 cents, or 9%, to return to $3 pricing for the first time since late January. For the week, the front-month gained a whopping 55.8 cents, or 22.8%, for its best percentage gain since the week ended July 31, 2020.

“The European weather model rose by a whopping net 39 degrees over the weekend for the forecast period,” Houston-based energy markets advisory Gelber&Associates said in its note on natural gas. 

“The GFS and other major weather models have also mimicked this move giving validation to this warmer weather forecast,” Gelber added. GFS is in the main U.S. weather model.

An unusually warm winter has led to considerably less heating demand in the United States this year, leaving more gas in storage than initially thought.

Storage of natural gas stood at a total 2.114 tcf, or trillion cubic feet, as of Feb. 24 — up 27% from the year-ago level of 1.66 tcf and 19% higher than the five-year average of 1.77 tcf, the EIA, or Energy Information Administration, reported.

Responding to the warmth and lackluster storage draws, gas prices plunged from a 14-year high of $10 per mmBtu in August, reaching $7 in December before hitting a 2-½ year bottom of $1.967 in late February.

Since then, the market has rebounded on an anticipated rise in U.S. heating demand over the next two weeks from colder-than-normal weather conditions.

Daily production of gas has also fallen to 97.5 bcf, or billion cubic feet per, from highs of over 100 bcf per day.

Another upside for gas bulls has been the improving feed demand for liquefied natural gas with a steady pickup in volumes going into the Freeport LNG terminal in Texas, which has been slowly getting back to normal operations after a fire in June. Freeport had been a rock-solid base of 2 bcf of gas demand a day until it was knocked out.

Monday’s weather readings had put a different, albeit bearish, perspective on the price outlook for gas, Gelber said. 

“Market players used the forecasted mid-March cold snap and the fact that the market was technically oversold to drive a short covering rally. At the time weather had trended consistently cooler for the days leading up to the weather shift and average temperatures across the lower 48 were hovering around 42 degrees and looking to push lower. The temperatures caused over 10 Bcf to be added to expected demand.”

Monday’s reading of HDD, or heating degree days, was thus lower than the previous forecast, Gelber said. 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 degrees Fahrenheit (18 degrees Celsius).

“The peaks of HDDs during the mid-March cold snap have dropped massively and are much more in line with the 30-year normal. Compared to yesterday’s forecast approximately 23 population-weighted HDDs were lost in total over the forecast period,” it said.

“This has translated to roughly 43.70 Bcf of demand lost over the forecast period in total. In addition to the fundamental support, the past week's rally appears to have been overextended evidenced by how the market corrected down in such a drastic manner,” the Gelber note added.