Commodities Analysis & Opinion

Natural Gas Clings to $2 as Bears Eye Last Vestige of Support 


  • $2 support is the last major defense line for gas longs; market is now around $2.40  
  • US gas storage seen up 12% year-on-year, despite last week’s forecast draw
  • If gas goes below $2, the hard stop may be at the $1.80 level 
  • Winter weather is benign, with sheer warmth following each cold blast

It started at $6. And like nine pins falling, one support level after another was taken out in under two months. Now, natural gas bears are eyeing what appears to be the last major line of defense held by the longs: $2 support.

There’s no telling if the short-sellers will get their wish. Taking gas to $1 territory will indeed be a pricing triumph for the bears. But to stay there, storage levels of the heating fuel have to justify such pricing. 

At Wednesday’s settlement of $2.3960 per mmBtu, or million metric British thermal units, the front-month March gas contract on New York Mercantile Exchange’s Henry Hub was 40 cents adrift of gas bears’ target. The difference was narrower at the day’s low of $2.369 — which marked a near 2-½ year bottom. 

Neither is, of course, high water for the bears. 

Having gutted 65% of the market from December’s $7 highs, what’s another 40 cents, or 17%, down, one could ask.

Commodities chartist Sunil Kumar Dixit says immediate resistance for Henry Hub gas is seen at between $2.47 and $2.56 going forth. He adds:

“Below this zone, further declines towards $2.18 and $2.05 is a high probability. On the flip side, clearing through $2.56 and having a sustained break above $2.68 to $2.78 will help gas bulls rebuild and reach $2.989.”

As outlined earlier, taking gas under $2 will require storage justification. 

According to the latest US gas storage reading provided by the EIA, or Energy Information Administration, for the week ended Jan. 27, inventories of the heating fuel stood at 2.583 tcf, or trillion cubic feet. That is up 9.4% from the year-ago level of 2.361 tcf. 

The agency will provide its next inventory update, for the week that ended Feb. 3, at 10:30 ET (15:30 GMT) today. All indications are that it will be lower than the previous week, not higher. 

That’s because US utilities likely pulled a larger-than-normal 195 bcf, or billion cubic feet, from storage that week due to slightly-colder-than-usual weather that bumped up heating demand, according to a Reuters poll of industry analysts.

During the previous week ended Jan. 27, utilities pulled 151 bcf of gas from storage. 

The 195-bcf estimate was still smaller than the 228-bcf withdrawal recorded during the same week a year ago, though it was bigger than the five-year (2018-2022) average decline of 171 bcf.

Most importantly, the forecast for the week ended Feb. 3 would cut stockpiles to 2.388 tcf, leaving it about 12% above the same week a year ago and 6.2% above the five-year average.

In recent weeks, the bottom targeted by gas bears was said to be as low as $1.50. Henry Hub’s charts, however, show the first stop for a low under $2 at $1.815, a level reached on Sept. 23, 2020. That seems to be what the shorts are angling for, rather than $1.50 — which would be 90 cents, or almost 38%, below current levels.

For argument’s sake, during the week ended Sept. 23, 2020 — when gas was at that low of $1.815 — storage was at a whopping 3.756 tcf. To recap, the forecast for last week’s storage was 2.388 tcf. That’s 1.368 tcf lower than the reading from September 2020. It means that when gas was trading under $2, inventories were 57% higher. So, when gas bulls say the market is oversold, they may have a case. 

But there’s something else to consider. Back in 2020, US exports of LNG, or liquefied natural gas, were at around 15 bcf per day. Now, they are over 20 bcf daily. So, the volume of gas kept in underground caverns itself has shrunk dramatically, thanks to the amount of LNG the United States ships out each day. The caveat for that now, of course, is the reduction in shipments with the unusually warm winter since December, which has reduced demand for heating across the Northern Hemisphere.

All things being equal, the trade still considers last week’s projected 12% hike in storage from a year ago as “high”.

That’s why some research houses — like Houston-based energy trading consultancy Gelber & Associates — suspect the bottom is not in yet. In remarks issued earlier this week, Gelber’s analysts said: 

“Several catalysts could take prices lower still. For example, if the major weather forecast models show signs of backpedaling on the mid-to-late February pattern shift or shorten its duration as they have pretty much all winter long, or if production rises back above 100 bcf/d, or if volumes to Freeport are interrupted; NYMEX gas futures could test new lows or possibly sink to the $2.00/mmBtu area.”

Gas production has, meanwhile, averaged near record highs of around 100 bcf per day in recent months, significantly weakening the fundamental outlook for the market.U.S. Dry Gas Production

The other thing to think about, of course, is how much more cold is left in the six remaining weeks of winter.

The extended outlook of the US-based GFS, or Global Forecast System, and the European ECMWF weather model suggests that a bout of chilly, sustainable cold may be on the table in about three weeks from now. Still, that forecast has been ripe with inconsistencies.

The number of GWDDs, or Gas-Weighted Degree Days, beginning around Feb. 18, does begin to advance higher, but it will take at least a week or more before overall model confidence increases on this possible Arctic intrusion.

Adds Gelber’s analysts:

“While the longer-range temperature forecasts may be a bit bullish, the near-term temperature outlook, which holds the biggest sway in the market right now, has continued to look lackluster. The next few days of tepid conditions will be a prelude to more seasonable temperatures by the end of this week and the weekend before another bout of moderate conditions will emerge next week.”

NatGasWeather, another forecaster, has a similar view. In comments carried by trade journal, the forecaster said milder weather would likely quickly return by next week, with “pleasant” highs in the 50s to 80s Fahrenheit (10 to 27 Celsius) leading to “very light” demand for gas at the national level. It adds:

“There is some chillier weather in the forecast for the Feb. 17-19 period, but at least some of the data is showing a quick return to warmth by Feb. 20. Essentially, like in every instance this winter, cold isn’t forecast to last more than several days before warmer temperatures immediately follow.”

After Thursday’s storage update, inventories could further grow from a mostly warm February outlook, cautions.

If that’s true, then it brings the question: Is this a winter we’re having or an extended fall?




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