Natural gas: what is going on?

Energy , Natural Gas , USA Feb 28, 2014 No Comments

Natural gasIn one of the most volatile, whip-sawed commodity markets in recent memory, March natural gas prices tumbled this week, in part due to simple “winter end” profit taking, and the fact shale production increases will come back to haunt this market, in the months ahead.

On Feb. 10, natural gas was about $4.50 per million BTUs. Ten days later the price was up 30 percent, to more than than $6. Now, it’s back down to $4.50.

U.S. inventories fell 95 billion cubic feet in the week ended Feb. 21 to 1.348 trillion, the Energy Information Administration said yesterday. Analyst estimates compiled by Bloomberg showed a withdrawal of 102 billion. Commodity Weather Group LLC expects normal or warmer-than-average weather for parts of the Great Plains and West March 9 through March 13.

“We have some warm weather coming and that’s what the market needs to move lower,” said Kent Bayazitoglu, an analyst at Gelber & Associates in Houston. “The storage number was pretty close to expectations and the selloff had actually occurred earlier this week.”

Natural gas for April delivery fell 3.9 cents, or 0.9 percent, to $4.502 million British thermal units at 12:01 p.m. on the New York Mercantile Exchange after dropping to $4.441, the lowest price since Jan. 22. Volume for all futures traded was 2.4 percent below the 100-day average. Prices are down 26 percent this week, heading for the biggest one-week drop since December 1996.

As natural gas in storage drops toward 1 trillion cubic feet, it is important to understand that this winter’s demand on storage has been the fastest on record. More than 2.4 trillion cubic feet has already been drawn from the nation’s supply, and there could be additional large draws throughout the month of March and even into April. This week’s drawdown was barely a third of the previous week’s draw of 250 billion cubic feet, and well below the five-year average draw of 125 billion cubic feet.

So what the heck happened? The first part can be explained in two words: polar vortex. With record low temperatures and an epic winter still blasting much of the country, demand for natural gas has been much higher than in previous winters. So prices jumped as traders got bullish and speculators poured money into natural gas futures contracts, betting on rising prices.

Fast forward to Feb. 19, and speculators were holding 564,640 futures contracts, a record long position, says Timothy Evans, an energy analyst at Citigroup Global Markets . By that time, natural gas was trading at around $6, giving speculators something along the lines of $30 billion in natural gas contracts. Again, that’s a record.

And then, the selloff began. Through Wednesday, prices were down 22 percent for the week, marking the biggest three-day loss since December 2005. Now speculators selling natural gas contracts at the end of February isn’t exactly strange. It’s actually what they always do. The trade is known as the widow-maker. As futures contracts for March expire, as they did on Wednesday, traders roll their positions forward into April and May contracts. Since the end of winter is approaching, the spring months tend to be what are called shoulder months, when temperatures rise and demand for natural gas falls. Along with prices.


Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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