This is going on a old week but We held off on posting until natural gas looked like it was closer to bottoming:
Gas prices have fallen, and fundamentals are still critical
We had a really cold start to November and gas prices reached their highest levels since May. Heating demand around November 10 surged above 40 Bcf/d, pushing prices past key resistance at $3.16. But, down 7 cents yesterday alone, prices have fallen back in recent weeks due to milder temperatures and weaker demand. In the second half of November, U.S. heating demand was flat, at ~31 Bcf/d, which was a five-year low for the time of year. Prices have since dropped to $2.91, with tremendous technical support at around $2.85. It's been so warm that we are expected to have an injection reported this week for storage, compared to a five-year average withdrawal of 69 Bcf. But, with colder temperatures coming, I can't see that January contract going much lower, and know that it expired last year at $3.93. I'm expecting gas for heating to surge to over 55 Bcf/d in the 8-14 day forecast.
Indeed, looking forward, weather forecasts are the single most important input for gas demand and prices because of heating. And they can change on a dime. The Weather Channel reports, "December Temperature Outlook Update: Colder Than Average in Northeast and Great Lakes, Warmer Than Average in West." Longer-term through March, both the Midwest and Northeast are expected to see below-average temperatures, with winter expected to be much colder than the historically warm two previous winters. Always take these with a grain of salt: last winter was supposed to be 10% colder than normal, and it wasn't.
Will gas prices run-up at the end of December like 2016?
Dare I say it, gas markets can go crazy at the end of the year. For example, oftentimes the Varsity team in trading houses goes on vacation after Christmas, and the JV takes over. These less experienced players can overreact to news and irrationally move markets. Additionally, at the end of the year there's lower trade volumes, so run-ups are easier. Last year was the perfect example, as prices surged to nearly $4 at the end of December. No doubt that the recent warm temperatures in the 60s in Manhattan have jaded the mindset of traders, prone to thinking that because the walk from the subway to the office was warm the rest of the country must be warm as well.
The $4 mark is going to be a critical resistance price for gas. In fact, prompt month hasn't settled at that level since December 1, 2014....MUCH MORE