Natural gas bulls have done a remarkable job keeping prices for the fuel near the key $3 level this late into summer, thanks to unseasonable warmth and low stockpiles. However, the onset of milder weather will make avoiding a correction harder, analysts say.
Some traders had expected the market to slump this week, on suggestions that rains brought by Hurricane Florence would cool areas beyond the Carolinas, cutting into demand for air-conditioning and, consequently, the gas required for power generation. Instead, temperatures stayed higher than normal, and outages at nuclear plants forced utilities to lean more heavily on gas-fired stations to generate power. This caused gas prices to rally.
8 Percent Gain On Week Sighted
On the New York Mercantile Exchange on Thursday, natural gas for October delivery settled at $2.976 per million metric British thermal units (mmBtu), up 2.3 percent on the day. Barring major shifts on Friday, the market could end the week up about 8 percent.
Investing.com's daily technical outlook has a “Strong Buy” on NYMEX gas, with no meaningful sell targets for now. Even if the market gives back some gains before the week is through, it won’t diminish a major milestone set by gas bulls on Thursday—a one-month high at $2.99, just a cent shy of their much-desired target.
Extraordinary Prices Close To “Shoulder” Season
The Henry Hub spot price, which represents day-to-day gas prices in the physical market, meanwhile, hit a January peak of $3.055 on Thursday. With the market so close to the “shoulder season” between fall and winter—when neither air-conditioning nor heating is typically required—such prices were quite extraordinary, said some traders.
Still, analysts doubt the winning streak in gas will last a lot longer without correction. They cite forecasts for milder weather, continuous record highs in gas production and significantly larger injections of gas expected into storage from late October.
“The eight to fourteen-day forecast is less supportive … as cool down area is covering a wide portion of the country,” Dominick Chirichella, analyst at the Energy Management Institute in New York, said, outlining the case for potentially lower power generation in the coming fortnight.
Benign Weather Will Make Correction Inevitable
Daniel Myers, analyst at Houston-based energy consultancy Gelber & Associates, said benign weather at this stage would inevitably weigh on gas prices. “I think we’re going to have a tough time going to $3 until we see some real hard winter. We’ve had a 25-cent trading range, from $2.75 to under $3, the past two months. I think that will probably persist for most of the fall,” said Myers. He added:
“Milder weather next week and a flip to early cold at the beginning of October will bring an abrupt end to remaining demand for cooling. This will allow for larger injections going into next month.”
Fluctuating Storage Ideas
Utilities added 86 billion cubic feet of gas to storage last week, the balance of what they produced but did not burn, data from the US Energy Information Administration showed on Thursday. It was the first time in weeks that the storage injection surpassed the five-year average of 76 bcf.
Yet, this week’s relatively strong power generation could result in another underwhelming storage report next Thursday, delaying a price collapse, said Chirichella. And gas bulls may luck out again if weather patterns swing for any reason.
“If we get another round of hot temperatures or premature cold weather, it will almost guarantee that inventories at the start of the heating season could be the lowest in a decade,” Chirichella said, pointing to the possibility of further price support.