Natural gas: Is the polar vortex imminent and how severe could it be?
- After moving into freezing territory, the weather signals turn slightly bearish
- Natural gas prices fell 7% a month ago after rising nearly 30% in five days.
- Gas supporters expect another rally after the supply freeze.
Are we seriously considering a polar vortex as severe as 2014 in December? thisthis hourSome meteorologists hinted at that to explain the continued recovery all week into Tuesday.
But that rally was dashed by a hardening of the outlook on Wednesday, which suggested the weather might be less cold than expected.
Of course, “naty” – as they say in the business – wouldn’t be “natty” without volatility. In light of this, a 7% drop in gas futures at the Henry Center of the New York Mercantile Exchange on Wednesday was seen as “fair” after a jump of almost 30% over the past five sessions.
The Hub’s first-month futures contract rose from a six-week low of $5.34 per million British thermal units (mmBtu) on Dec. 6 to a two-week high of $7.10 on Dec. 13. December
Still, the gains and corrections after the announcement of a less threatening weather forecast came as a shock to some.
Alan Lammey, an analyst at Gelber & Associates, a Houston-based gas markets advisory firm, said in an email to clients of the company seen by Investing.com on Wednesday:
“We are more than a week away from a massive polar vortex bearing down on the United States, blanketing much of the country in freezing cold, ice and snow.”
Natural gas for January delivery on the New York Mercantile Exchange’s Henry Hub settled down 50.5 cents, or 7.3%, at $6.43/mmBtu on Wednesday.
Earlier, the benchmark gas contract rose from a six-week low of $5.34 on Dec. 6 to a two-week high of $7.10 on Dec. 13.
According to Mr Lammey, Wednesday’s market reversal was notable because “the oncoming Arctic winter blast will be the coldest for a December month since 2010”.
The last polar vortex occurred in 2014. Weather records show similar cold snaps before that, including several notable freezes in 1977, 1982, 1985 and 1989.
Before Wednesday, the U.S. Global Forecast System, or GFS, and Europe’s ECMWF weather model had consistently shown the potential for near-record cold to last through the end of 2022.
This led hedge funds in the market to strongly defend Henry Hub’s first-month price of $7 during a five-day rally, although gas bulls still failed to rise above $7.10.
In Gelber’s email, Lammey joked about the “price protection type.” [qui] it can be compared to an opposing basketball player blocking a good opportunity to shoot a spike.”
“The result is that gas futures failed to reach the next high of $7.20 to attract stronger bids and trigger a resumption of short selling.”
But the rally broke up as the weather turned warmer in the last 24 hours.
Weather changes aside, some goose bears were betting that gas reserves will be sufficient by the end of the year, despite the threat of an outbreak in the Arctic. They even argue that the annual premium is justified due to the return of the storage deficit, strong export demand for LNG (liquefied natural gas) and opportunities to switch to gas due to high coal prices.
Ahead of Thursday’s weekly gas inventory update from the Energy Information Administration, or EIA, analysts tracked by Investing.com expect U.S. utilities to draw 45 billion cubic feet of inventory in the week ending Dec. 9. billion cubic feet last week, December 2.
Gas supporters also explained that one or two more rallies may be held before the end of the year.
EBW Analytics Group analyst Eli Rubin said in comments to naturalgasintel.com:
“Despite a slight erosion in the extent of the cold, the overall picture remains unchanged, showing a strong increase in weather-related demand during the month.
A supply freeze could add to the tension in the market. While downward pressure is likely to continue on a seasonal basis, the cold weather expected towards the end of the year could initially lead to further upswing.”
On the supply side, Wood Mackenzie pipeline estimates showed domestic production fell by about 2 billion cubic feet per day (bcf) on Wednesday. This makes the total production about 98.2 billion cubic meters per day. Just a few weeks ago, production was over 102 billion cubic meters per day.
Wood Mackenzie analyst Laura Munder attributed the decline in output to pipeline repairs and operational issues, advising clients to expect revisions to estimates on Thursday.
Estimated production declines include about 635 MMcf/d in northern Louisiana, about 415 MMcf/d in the New Mexico portion of the Permian Basin and about 320 MMcf/d in Oklahoma, Munder said.
Warning: Barani Krishnan uses a different set of perspectives to bring variety to market analysis. For the sake of neutrality, it sometimes presents opposing views and market variables. He does not hold positions in the commodities and securities he writes about.