Natural gas fundamentals remain weak

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After starting Tuesday’s trading session with nothing but selling the natural gas futures market was able to stabilize and end the day with a small gain. Today is expiration day for the spot Nymex November natural gas contract and so far the November contract is trading slightly lower while the soon to be spot December contract is marginally positive.

With a very weak November contract heading into the history books after today’s session the market could then set-up for an overdue bout of short covering in the coming week or so as the overall market remains extremely oversold. That said the overall market remains simply bearish with a very robust level of gas in inventory with additional building to continue well into November ending the injection season close to 4 TCF in inventory.

With an El Nino winter playing out most projections are calling for heating fuel consumption coming in well below normal through the majority of the winter. If this scenario turns out to be the case the end of the winter season inventory level could turn out to be at a record high level for that time of year and thus a major drag on prices throughout the winter heating season and into the spring. Recall how weak prices were in 2012 after a warmer than normal winter heating season.

Weather forecasts for the forward period are not always accurate and thus there is still the possibility that the upcoming winter heating season could turn out to be closer to normal. However, even with a normal winter heating season consumption will still not be enough to draw down what is likely to be a record high level of gas in inventory at the end of November and thus limit any significant and sustained price rally going forward. The market is likely going to struggle to move back up to the $3/mmbtu level and beyond unless there is a sustainable round of cold temperatures.

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