The worst fears of gas bears may have come true.
Inordinate chill in the U.S. at this time of year and at the same time Europe hungry for any additional U.S. cargo of liquefied natural gas as it looks to ban Russian coal mean shorting the Henry Hub is an extremely risky proposition.
At the same time, there’s no immediate potential for a meaningful rise in production or alternative fuels to turn to.
Therefore, the storage crisis in natural gas is getting worse by the week, with very little that can be done to alleviate the supply tightness.
On the Henry Hub, bulls appear set for a fourth straight week of gains as the front-month gas contract tacked on a cumulative 30% over the past month.
The front-month did swing nearly 35 cents in Wednesday’s trade after it hit a six-month high of $6.393, settling almost flat at $6.029.
By Thursday though, it was coasting higher again, reaching $6.127 by 2:00 AM ET (6:00 GMT), ahead of regular New York trading.
There’s “very little technical resistance in the way of additional upwards movement,” Dan Myers, analyst at Houston-based gas markets consultancy Gelber & Associates, wrote in an email to the firm’s clients on Wednesday.
Sunil Kumar Dixit, chief technical strategist at skcharting.com, agreed. He said the stochastic and Relative Strength Index readings across the daily, weekly and monthly charts of natural gas were all strong.
“Yesterday’s rejection at $6.394 will not dampen the gas bull, given that the market settled on the strong side of $6,” said Dixit.
“So long as $6.15 holds, we can expect a retest of $6.45 and $7 over the short term. A break below $6 can trigger some short term correction though, to $5.80 - $5.50 and $5.30.”
Typically, gas in the shoulder-season, which refers to the stretch between end-March and mid-May, trades below $3, dipping below even $2 in 2020.
The current pricing and upward momentum has, therefore, dramatically transformed the doldrum-like market at this time of year.
One reason for that is the stubborn cold that has lingered since the end of winter.
After a storage injection in the previous week to Mar. 25, analysts expect gas in underground caverns to have dipped again last week due to heating demand triggered by unexpectedly cold weather.
Sources: Gelber & Associates
In its weekly update due at 10:30 AM ET, the Energy Information Administration is likely to report that utilities pulled 26 billion cubic feet (bcf) of gas from storage during the week ended Apr. 1 to keep up with heating demand, according to analysts tracked by Investing.com.
But the draw was also likely the last for the 2021-2022 winter heating season and compares with a build of 19 bcf during the same week a year ago and a five-year (2017-2021) average injection of 8 bcf.
In the prior week to Mar. 25, utilities were able to inject 26 bcf of gas into storage.
If analysts are on target with their estimates, the withdrawal during the week ended Apr. 1 would take stockpiles down to 1.389 trillion cubic feet (tcf), about 16.7% lower than the five-year average and 22% below the same week a year ago.
The weather last week was cooler than normal with 118 heating degree days (HDDs) compared with a 30-year normal of 102 HDDs for the period, data from Refinitiv showed.
HDDs, 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).
Forecaster Bespoke said its weather models have dipped a little further toward mid-April, as a trough emerges from the West and chills the Midwest and East.
In a report carried by naturalgasintel.com, Bespoke said the brief chilly blast “keeps alive the theme of variability” as the 15-day outlook remains slightly-warmer-than-normal overall.
“The La Niña state remains intact, which we suspect ultimately leads to a hotter summer this year, compared to 2021,” Bespoke added.
Demand, meanwhile, was stronger-than-usual amid sluggish production growth, said the analyst team at Tudor, Pickering, Holt & Co.
Even as output in the Permian Basin recently reached new highs near 15 bcf daily, overall supply has remained constrained relative to TPH’s expectations for the shoulder season.
“Overall, with the risk of a delayed ramp-up in volumes through the year alongside robust demand, we see continued potential upside pressure for pricing as limited demand destruction appears on tap in the present gap above historical pricing levels,” analysts at the firm said in comments also carried by naturalgasintel.com.
“The US remains at the low-end of various global cost curves, with increasing potential for additional LNG exports presenting support” for balances in 2023 and beyond, they added.
At the same time, the outlook for U.S. and global natural gas pricing continues to be skewed to the upside—even at $6, the firm said.
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.