End-of-Winter Storage Speculation Driving Short-Term Price Action
The sentiment across both power and natural gas markets is unusually bearish for this time of year. The main culprit is a combination of an increase in natural gas production and normal weather which has set the table for an ample amount of natural gas to be available. Right now, natural gas underground storage is projected to end the heating season above the 5 year average which is heavily supported by January Heating Degree Day expectations to be in line with the 10 year historical average. Money managers also appear to be expecting further downside price action as they added almost 50,000 short positions (betting prices will go down) over the past week. This supports the theory that we will enough storage at the end of the winter withdrawal season.
Power and Natural Gas prices reflect the current bearish sentiment as they continue to remain in contango for the first time in almost two years. So far this month, the 2018 natural gas strip has lost 35 cents compared to 2019 which lost 13 cents and 2020 which went down by 6 cents.
In order for the market to turn positive we need sustained below normal weather to increase demand and tip the balance back in favor of the bulls.
Source: Constellation NewEnergy
Working gas in storage was 3,444 Bcf as of Friday, December 15, 2017, according to EIA estimates. This represents a net decrease of 182 Bcf from the previous week. Stocks were 183 Bcf less than last year at this time and 84 Bcf below the five-year average of 3,528 Bcf. At 3,444 Bcf, total working gas is within the five-year historical range. (EIA)
Confidence among U.S. homebuilders jumped in December to the highest level since July 1999, exceeding all analyst estimates, as a growing economy boosts housing demand, according to data released Monday, Dec. 18, by the National Association of Home Builders/Wells Fargo. (Bloomberg)
As a result of the incremental associated gas supplies, it seems likely that unless the winter is unusually cold that natural gas supplies will at least keep up with demand. In that case, natural gas prices would probably remain in the $3/MMBtu range, with the potential to move lower if oil production continues to make gains. (Forbes)
January centerline HDD forecast is 946 with the most likely range being 1,000 and 900. This forecast is a bit colder than our initial thoughts of 924. Hence, this January looks significantly colder than last January. On the other hand, this January looks significantly warmer than 2014 which is the coldest January since the turn of the Century. Our forecast corresponds to the 10-year normal which is the coldest/highest of the 3 normals. (RiskPulse)