Natural Gas Outlook
Natural gas producers may have set a record for stockpile additions in the last week in October, but this didn’t sway traders who continued to push the market higher in anticipation of colder weather.
Current weather reports suggest that the U.S. is about to get hit with a blast of Arctic air next week. This is putting a lid on the selling pressure as traders expect a sharp increase of heating demand to put a dent into the record supply.
According to the latest data from the U.S. Energy Information Administration, producers finished the Fall storage refill season with a 91-billion-cubic-feet injection to stockpiles during the week-ended October 31. This was 5 bcf larger than traders expected and more than double the typical addition for that week of the year in the production cycle. According to 20-years of EIA records, the addition also represented a 17% increase over any addition for the last week of October.
An injection of this magnitude would normally hit natural gas futures hard, however, the January Natural Gas futures contract merely dipped. This suggests that the size of the injection had already been priced into the market, and that the cold weather is coming. After the initial dip, the market stabilized and prices eventually recovered pre-report levels.
Now that the seasonal injection period is over, investor focus is likely to shift to the prospect of strong heating demand. This, combined with low price levels has given speculative bargain hunters and bottom-pickers an excuse to aggressively pursue the long-side of the crude oil market at current low price levels. Volatility and upside momentum could also increase substantially not only because of the fresh buying, but also because a large number of short-sellers will have to cover.
Natural gas traders should note that the market reached its seasonal bottom last year on November 6, 2013. This helped stabilize a bearish market initially as investors waited for the cold weather to take hold. Eventually they were rewarded with the “Polar Vortex” which created a prolonged or lingering cold weather pattern, leading to a huge draw down in supply. This season seems to be shaping up in a similar manner.
This season’s bottom may have occurred two weeks early given the cold weather surge that has helped drive natural gas prices higher during its current longest rally of the year as traders priced in an expected sharp…