Natural gas futures rallied 11% yesterday, increasing by $0.6 to settle at $6.149 per million British thermal units (MMBtu) during trading yesterday on the New York Mercantile Exchange (NYMEX). This is the highest price seen for the commodity’s futures in over five years. The price hike is largely attributable to latest weather forecasts, which have spurred expectations of a spell of severe cold across Midwest and Northeast region for the next two weeks.
1. Anticipation of Cold Weather
The 11 to 15 day forecast points to "ongoing colder than normal conditions" over much of North America, said meteorologists at MacDonald, Dettwiler and Associates (MDA) Weather Services in Gaithersburg, Maryland. Temperatures in Chicago are expected to go below zero degrees Fahrenheit (below -18 degrees Celsius) by the end of next week. On the other hand, temperatures in New York are expected to fall into the teens, according to the MDA forecast.
“Traders are looking at a new weather forecast calling for colder temps over the next couple of weeks and concerns about deliverability with storage levels so depleted,” said Beth Sewell, managing partner at Quantum Power & Gas Services.
Colder temperatures are forecasted for the Midwest, South and East Coast and because of that, natural-gas storage levels are at about 34% below last year’s levels, and about 27% below the five-year average, she said.
Natural gas futures have increased by over 46% since the beginning of the year from levels of $4.193/MMBTU on December 31 to five year highs of $6.149/MMBTU on the NYMEX yesterday. The increase in futures prices is attributable to the fact that natural gas inventories have been declining at a very rapid rate this year, largely due to an increase in demand by various regions in the country. So far, the commodity’s futures have increased 24% in February alone.
2. Natural Gas Inventories Saw Their Biggest Two Declines in This Winter
Last week, the statistical arm of the Department of Energy reported a decline in inventories of 237 billion cubic feet (bcf). The extent of increased level of withdrawal from natural gas inventories can be judged by the fact that for this same week last year, natural gas inventory declined by only 127 bcf. Currently, natural gas inventories are standing at 1,686 bcf, which is 33% lower than the inventory levels of 2,549 bcf a year ago, and 27.2% lower than the five-year average of 2,317 bcf.
This winter season has seen two largest declines in natural gas inventories so far. The biggest decline in natural gas inventories was recorded for the week ending on January 10, when the EIA reported a decline of 287 bcf in natural gas inventories. The second-largest decline was recorded earlier in the winter season, when the EIA reported a 285 bcf decline on December 20, 2013. These were the largest weekly declines seen, ever since the EIA started reporting weekly estimates in 1994.
3. Anticipation of the EIA’s Weekly Report
The US Energy Information Administration (EIA) will release its weekly natural gas supply data today at 10:30 am EST for the week ending February 14. According to estimates by 16 analysts on the Street, natural gas inventories are expected to decline by 257 bcf, with the lowest decline in inventory estimated at 236 bcf; the highest decline in estimates is at 270 bcf. If the decline in inventory levels remains in line with analysts’ estimates, then inventory levels will decline to 1,429 bcf, and of supply fall to that level, it would be the lowest since February 2004.
Natural Gas ETF Update
The United States Natural Gas Fund LP (UNG) has increased by 30.2% since the beginning of the year. The exchange-traded fund (ETF) tracks the movement of natural gas futures contract on the NYMEX. The ETF’s short ratio has declined from 1.8 days on January 15 to 0.9 days on January 30. This does not necessarily indicate that investors are covering their short positions; the decline in short ratio is the result of an increase in average daily volume, which went up from 6.81 million shares from January 15 to 22.27 million shares on January 31. The increase in daily volume indicates that investors are suddenly more interested in the commodity. Short interest has increased from 12.24 million shares on January 15 to 20.14 million shares on January 31.
The increase in natural gas futures is a surprise to the market, which has registered low and stable prices for the commodity’s futures in the past five years. Around 22 months ago in April 2012, natural gas futures plummeted to $1.984/MMBTU, but ever since have remained at around $4-5 per MMBTU.
Currently, natural gas futures are trading below $6/MMBtu; prices are declining by around 2%, erasing some of the sharp gains that the futures saw yesterday and, indicating that there has been a correction in the market.