Natural Gas Falls From 4-Month High as Cold Outlook Eases

Natural gas futures dropped in New York for the first time in 10 days, retreating from a four-month high, on speculation that moderating cold later this month will limit heating demand.

The government’s Global Forecast System midday update showed easing frigid weather east of the Rocky Mountains 11 to 15 days from now, said MDA Weather Services. Gas prices jumped as much as 28 percent from an 11-month low on Oct. 27 as forecasts turned progressively colder. Bearish bets on gas dropped last week for the first time since Oct. 3, government data show.

“It’s a combination of a little bit warmer GFS and the market needed a pullback anyway,” said Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston. “Those people who were short came in every morning looking at colder temperatures and more demand so they were forced to cover positions.”

Natural gas for December delivery dropped 15.7 cents, or 3.6 percent, to settle at $4.255 per million British thermal units on the New York Mercantile Exchange after rising to $4.544, the highest intraday price since June 26. Volume for all futures traded was 72 percent above the 100-day average at 3:15 p.m. Futures are up 20 percent from a year ago.

The relative strength index, a technical indicator based on price momentum, fell to 64.8 at 3:15 p.m. after trading above 70 since Oct. 5. Some traders see readings above 70 as sell signals.

Call Options

December $4.60 calls were the most active options in electronic trading, dropping 7.4 cents to 5.7 cents on volume of 1,019 at 3:38 p.m. Calls accounted for 68 percent of trading volume.

“We had a market that was overwhelmingly short, then all of a sudden they were trapped and we had a massive short squeeze extracting a lot of pain out of all those bears,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. “We’ve got some brutal cold coming our way and that was the catalyst.”

Hedge funds almost tripled net-long positions, or bullish bets, for four U.S. gas contracts to 57,517 futures equivalents in the week ended Nov. 4, rebounding from the lowest level since March 2012, Commodity Futures Trading Commission data released Nov. 7 showed. Short positions slid 7.3 percent from an 11-month high.

Cold Minneapolis

“This next polar vortex is hitting hard and is expected to persist for several days,” said Scott Hanold, energy analyst at RBC Capital Markets in Minneapolis. “It’s a cold start to winter and people are engaged again.”

Sub-freezing temperatures will sweep across the Great Plains, Midwest and into the East and Texas through next week, according to Commodity Weather in Bethesda, Maryland.

The low in Minneapolis on Nov. 14 will be 2 degrees Fahrenheit (minus 17 Celsius), 25 below normal, to AccuWeather in State College, Pennsylvania, said on its website. New York City’s low on Nov. 19 will drop to 29 degrees, 12 below average, while the reading in Dallas will be 36, 10 lower than usual, according.

The government forecast “did warm up a bit, notably across the central and eastern U.S.” at the back end of the 15-day forecast, Eric Wertz, a meteorologist with MDA in Gaithersburg, said in an e-mail. The model indicates that the high in New York City from Nov. 21 to Nov. 25 will be in the mid-40s compared with the mid-30s in earlier models, while Chicago’s highs rose to the mid- to upper-30s from the upper 20s to low 30s, he said.

“This is the first model run of the major models to show such a warm shift,” Wertz said. “If other models start doing the same, we may buy into the theory of a warmer 11-15 day period but at the moment, that model run is an outlier.”

Milder Weather

About 49 percent of U.S. households use gas for heating.

“The developing cold in key gas-consuming regions looks to be a result of Typhoon Nuri moving into Alaska rather than a sustained change in weather patterns,” Adam Longson, an analyst with Morgan Stanley in New York, said in a note to clients today. The worst of this cold is “likely already priced in” and robust supplies will allow for another storage injection next week, eliminating a storage deficit in the East, he said.

Storage levels totaled 3.571 trillion cubic feet on Oct. 31, 6.8 percent below the five-year average, narrowing from a record 55 percent in March, according to the Energy Information Administration.

Gas production from the Marcellus shale in the East will average 16.1 billion cubic feet a day this month, representing a gain 1.3 percent from October and 19 percent from November 2013, the EIA said today in its monthly Drilling Productivity Report.

“After running up 14 percent last week, the slightly warmer noon-day update is simply an excuse to take profit,” said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York. “The pre-winter rally probably ran up too far ahead of fundamental verification.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE