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On the verge of the halfway point through a pivotal February, the natural gas storage and price landscape leading into the Spring is beginning to emerge out of a tumultuous fog, though the neck is still craned and the eyes strained. A mix of bearish weather and significantly reduced heating demand in late January brought forth the final two storage withdrawals for the month that each contributed to a contraction in the 1-year storage deficit, and narrowed the deficit when compared to the 5-year average levels. In fact, the EIA natural gas storage report for the week ending Jan 18th (released 01/24) showed a small surplus (1.4%) when compared to the same week in the year prior for the first time since the winter of 2016/17. Of course, the 1-year comparison is not quite as revealing as the comparison against the 5-year average, which still stood at an 11.4% deficit at that point.

A matter of days later, true to form and in keeping with the recent trend of pendulum-like extremes, a new single day natural gas consumption record of 150 Bcf was set on January 30, surpassing the prior record set on January 1, 2018. This single day consumption record was accompanied by several other low-temperature records as a crippling cold resultant of a polar vortex gripped most of the major demand centers in the United States for that same week. In its wake was a hefty withdrawal of -237 Bcf, the largest of the withdrawal season so far and quite possibly the largest we will see this season. With the large withdrawal bringing storage to 1,960 Bcf, the deficit to the 1-year level expanded back to 6.4% (vs. 2,095 Bcf) and a 17.5% deficit to the 5-year average (2,375 Bcf). In a seemingly counterintuitive move, the prompt-month contract actually moved down in the days/week that followed as the February contract had expired and most market participants turned their attention to the end of February and beyond. In fact, the nearby futures contract was trading below the $2.60 mark at the end of last week. Any more movement down, and we could be testing the most recent lows in March of 2016. In November, with the peak season on the horizon, the price of nearby futures rose to the highest price since 2014 at $4.929 per MMBtu. In early January 2019, the price dropped briefly below the $2.90 level, followed by a recovery to $3.722. It’s been a wildly volatile couple of months to put it simply.
This week’s upcoming withdrawal should prove to be relatively muted, around 90 Bcf, and should swing the pendulum back towards some contraction of the 1 & 5-year storage deficits. So, with about nine weeks remaining in the withdrawal season, it’s best to focus on what is on the horizon from a

weather/demand perspective that could further influence volatility or sustained price momentum in either direction. As of late, the market has been moving up on the heels of updated short-term weather models calling for a more widespread sustained cold ushered in by Winter Storm Maya with some serious potential staying power in the Midwest & Northeast. On a heating demand basis, the last week of February could show heating demand to be ~20% higher than the 30-year average. Although storage draws naturally decline going forward, the market may not be discounting this risk properly. But like with all things weather, the models could change overnight so it’s important to stay vigilant on the updates.

So far, we are seeing most models confirm a much colder than normal outlook starting Feb 20th, so if the weekend models confirm, natural gas prices could march much higher than the current $2.70 levels.

 

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