US Natural Gas Price Sinks Amid Mild Winter

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US Natural Gas Price Sinks Amid Mild Winter

The United States has seen a winter with warmer than average temperatures and, consequently, gas stocks have slumped back to their previous low level. Futures prices at the Henry Hub in February 2020 have fallen from $3 per million British thermal units from its peak of $4.80 in middle of November.

Gas stocks saw a large rally in the summer and autumn of 2020, but prices have fallen back to their original low – which has plagued the energy sector for the past three years. During the 2020/2020 cycle, consumption of energy was 6 per cent higher than average; however, since the milder winter set in four weeks ago, average prices were 4 per cent lower than usual.

A Matter Of Production

A surge in gas price from October to mid-November encouraged electricity producers to switch from gas to coal. Gas-fired generators were run for fewer hours in the fourth quarter and cheaper coal used instead, making low stores of gas go further.

The scarcity of gas stores was announced by the US Energy Information Administration, stating that the mid-December underground stock of gas was 20 per cent lower than the average for this time of year. However, this deficit was reduced to 14 per cent by the milder winter, as the capacity of gas generators were reduced.

The Influence Of Fund Managers

Back in October, US natural gas stocks were going into the winter with their lowest price for fifteen years; a small price rise was truncated by the high probability of an El Nino event, which causes the West Coast of the United States to experience a milder than average winter.

Hedge fund managers seemed to have been savvy about the predictions of a milder winter, further exacerbating the price drop. Between July and mid-November, hedge fund managers were the net buyers of futures and options, especially gas stocks.

However, as electricity produced by gas slowed and with US Federal predictions about a mild winter continuing, fund managers became net sellers – further plunging gas stocks to their new low.

Look for natural-gas prices to suffer as winter turns to spring

Myra P. Saefong

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The winter season has generated strong demand for natural gas amid tight U.S. supplies. That would normally lead to higher prices. So why has the heating fuel had one of the biggest price declines among commodities this year?

“Winter has been erratic so far, but this winter has also cranked out some of the biggest demand events ever seen,” says Richard Hastings, macro strategist at Seaport Global Securities. “This might happen again, but the heating season has a time factor—and the clock is ticking.” The winter season officially ends in late March.

That’s reflected in recent price drops. Natural-gas futures settled at $2.584 per million British thermal units on Friday, their lowest settlement since February 2020. That came just over two weeks after prices topped $3.50 for the highest finish in more than a year. Year to date, prices have declined roughly 12%.

Parts of the central and eastern U.S. experienced record low temperatures in late December through early January, driving demand for natural gas. The Energy Information Administration pegged daily domestic demand for the fuel at a record high of 150.7 billion cubic feet on Jan. 1.

“January saw the largest [U.S. supply] withdrawals on record: 359 [billion cubic feet] for the week ended Jan. 5 and 288 Bcf for the week ending Jan. 19,” the EIA said in its latest monthly energy-outlook report.

The report forecasts end-of-season working natural-gas inventories at about 1.4 trillion cubic feet—17% below the five-year average. “The inventory situation has tightened up decently,” Hastings says.

Since the record weekly drop, however, the weekly inventory decreases haven’t been quite as impressive. For the week ended on Feb. 2, U.S. natural-gas stockpiles fell 119 billion cubic feet, to stand at 2.078 trillion cubic feet.

“Despite the extended stretch of below-normal temperatures in the U.S. from late December into January, it was book-ended by relatively mild conditions,” says Richard Redash, head of North American Gas & Power Research at S&P Global Platts. “So even though there was a massive pull on U.S. storage during the cold spell, including a record weekly draw, the ‘damage’ was relatively limited,” he says. “February temperatures are shaping up to be more than 5% above the 10-year normal benchmark.”

Countering below-average inventories, the EIA projects that U.S. natural-gas production will reach a record 80.3 billion cubic feet per day this year, up 6.7 billion cubic feet a day from the 2020 level.

Adam Koos, president of Libertas Wealth Management Group, says that “efficiencies in production have lowered break-even costs, making it even easier to produce more than before.”

“The supply-and-demand equation is clearly skewed in favor of supply,” he says.

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Recent volatility in the U.S. stock market, following the more than 1,100-point plunge in the Dow Jones Industrial Average DJIA, +7.73% on Feb. 5—the largest single-session point decline in history (though it was nearly matched just three days later)—has also contributed to the more recent losses in natural gas, as well as other commodities.

The S&P GSCI Total Return Index XX:SPGSCITR , which tracks 24 commodities, suffered from its first back-to-back weekly declines since December. Natural-gas futures fell more than 9% for the week.

“Any recent lower prices in natgas US:NGH18 as a result of the stock market dropping this past week were more than likely paired with panic selling of all investments across the board,” Koos says. But the real “culprit” for the downside pressure was U.S. production.

Shorter term, natural-gas traders may see a “bounce in price via mean reversion” or due to a colder-than-expected February and March, Koos says.

Accuweather.com Senior Meteorologist Bob Smerbeck says that March is generally expected to be “colder than average, with above-normal natural-gas usage across the northern tier of the U.S.”

Still, with “all the good prospects for increased production in the future, the long-term picture looks bleak for those looking to make a big buck on natural gas,” Koos says.

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Natural gas prices at low for the year amid forecast of mild winter

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Inventories have been piling up since chilly February, knocking prices down 26% this year

Natural gas prices were at their lowest point this year, closing at $3.14 per million British thermal units, amid forecasts of mild winter across North America.

The price is the lowest since January 2020 and down 26 per cent from this time last year.

The bitter weather of January and February of this year as North America endured the grip of the polar vortex caused natural gas inventories to fall and prices to rise.

But last week the U.S. energy information agency found natural gas inventories have moved into a surplus position for the first time this year.

And the forecast of mild weather over the next seven days has traders backing away from the natural gas market.

The turmoil on oil markets has left natural gas relatively untouched until this week.

Spot gas prices often rise in the December through February period, when there is peak demand for both electricity and natural gas to heat homes.

The spot price for gas on the New York Mercantile Exchange was $3.75 per million BTUs just a week ago. Today’s price is down 15 per cent since then.

FX Empire analyst Christopher Lewis predicts the price will continue falling through the $3 US level.

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