Natural gas ((NYMEX:NGH14))is no longer a boring market. Another epic move in the market brings back memories from its peak production glory days. You remember, before fracking. Now days after natural gas bears tried to tell us that the spike in price when the February contract(NYMEX:NGG14) expired was just a fluke saw that gap get filled in an explosive move. Of course after it filled that gap and just edged out a new high knocking out a stop or two the market then fell like a rock. The move made almost a perfect double top and then a reversal, yet this market is not done yet. The market now is preparing for another massive draw down in storage that if it comes out at the high end of expectations could challenge those highs again. Volatility is back in the gas and the ride is not over nor will it be for the faint of heart.
How did we get here? We got here because of record cold weather, compliancy and belief in global warming. Low natural gas prices due to record production slowed incentive to make infrastructure improvements. As supply exceeded demand many drillers decided to move their resources to more profitable liquid drilling.
The market and traders made a lot of false assumptions. Perhaps the biggest one was that the assumption that natural gas producers could ramp up production to meet demand in a blink of an eye. Yet what we are finding is that that is not the case. Freeze offs due to weather are almost a historic high and it seems to bring on new production it takes longer that most people thought. Natural gas storage supplies are 16.6% off five-year averages and will fall much further today.
The other false assumption was that once natural gas prices increased we would see massive fuel switching back to coal for example. Yet the flexibility to switch back is not as flexible as it has been in the past.
In the meantime more non-heat related demand from factories to Zambonis is rising. That was unnoticed by the market as we failed to challenge false assumptions with weather. We are challenging those assumptions now.