Financial Trading Around March-April Spread Making Prices Incredibly Volatile

Highlights of the Natural Gas Summary and Outlook for February 7 2014 follow. The full report is available at the link below.

Natural Gas Summary and Outlook

• Price Action: Prices fell 16.8 cents (3.4%) basis the now prompt March contract to $4.775 on a 99.8 cent range.
• Price Outlook: The market maintained its’ incredible historical trend by establishing a new high and avoiding a rare inside week. Driven primarily by financial trading around the March/April spread, prices remain incredibly volatile. With some apparent moderation in the weather forecast and with prices just 3.6 cents away, the easy assumption is for a new weekly low next week. However, that is far from assured while a new high is considered rather unlikely. After 36 weeks that ended exactly at 4 up weeks, 17 ended at 5 weeks higher. The market is certainly extended and a more substantial pullback would not be surprising. The March print of $5.737 did not eclipse the $5.854 level from January 2010 while slightly exceeding the February level. The yearly storage comparison is expected to peak near 940 bcf for the week ending February 14 and while very simplistic, remains an important market factor. With high withdrawals last year over the next few weeks, the deficit is expected to in general contract through November as storage facilities begin to refill in April. The CFTC data for February 4 revealed a small drop in the net long position in the managed money category. It is still quite elevated and just below the record net long level of May 2013. Again, this position was as of Tuesday and does not reflect end of week activity. Total open interest across the complex fell to 4.91 million contracts as of February 4. CME futures open interest rose to 1.27 million contracts as of February 6.
• Weekly Storage: US working gas storage for the week ending January 31 indicated a withdrawal of 262 bcf. Thus, current inventories of 1,923 bcf fall 761 bcf (28.4%) below last year and 579 bcf (23.10%) behind the 5 year average. At the same time, the week ending January 24 revealed a revision that resulted in inventories falling an additional 8 bcf in the salt dome producing facilities. Thus, that weekly storage change fell to 238 bcf, compared to the originally reported 230 bcf.  
• Storage Outlook: Weather forecasts remain generally cool and have reduced our end of year storage forecasts to near 1,000 bcf.
• Supply Trends: Total supply was steady at 71.1 bcf/d. Lower US production offset higher Canadian and LNG imports. Higher Mexican exports also reduced supply. The US Baker Hughes rig count fell 14 with both higher oil and natural gas activity lower. The Canadian count rose 13. Thus the total North American rig count dropped by 1 to 2,392 and now surpasses last year by 2. The higher efficiency US horizontal rig count rose 3 to 1,176 and rises 33 above last year.
• Demand Trends: Total demand rose 7.5 bcf/d to 110.5 bcf/d. R&C demand lead the rise with power again a distant second. Electricity demand fell 11 gigawatt-hrs to 85,687, which exceeds last year by 9,313 (12.2%) and the 5 year average by 7,567 (9.7%). While there is evidence of coal regaining market share, this is basis a February index of $5.557 and cash prices in the double digits in many locations. The April-October strip remains near $4.50 and there was not much evidence of switching at this level. Thus, we believe the market will find solid support on the April-October strip until injections place inventories on pace to reach 3,800 bcf by November.
• Other Factors: The S&P 500 surged on Friday as a weak jobs report was discounted due to weather factors and also led to the thought the Fed may reduce the pace of tapering.