Warmer than normal weather is forecast to persist across the United States well into November, which has sent gas prices tumbling, reversing an earlier rally.
The futures price for gas delivered to Henry Hub in March 2017 has fallen by 43 cents per million British thermal units or 12 percent over the last six sessions.
The slump reverses an earlier rise of 14 percent between the first week of September and the middle of October (“U.S. natural gas prices surge amid supply fears”, Reuters, Oct. 17) .
Futures contracts with nearby delivery dates have been hit hardest by the selloff while contracts for deferred delivery have seen smaller falls.
The premium for gas delivered in January 2017 compared with gas delivered in July 2017 has shrunk from 34 cents to just 14 cents.
The slump has been sparked by unusually warm weather across the continental United States, which is cutting heating demand just as the country enters the heart of the heating season.
Temperatures have been consistently warmer than average across much of the country, especially the eastern United States, since the end of May.
During the summer, the warm weather boosted airconditioning demand and helped work down excessive gas stocks left over from last winter and was bullish for gas prices.
But it has persisted into the start of the heating season, threatening to cut gas consumption this winter and becoming a more bearish factor (tmsnrt.rs/2ePuAcW).
Heating demand so far this season has been 39 percent below the same point in 2015 and 53 percent below the long term average, according to the U.S. National Oceanic and Atmospheric Administration (NOAA).
Traders were initially prepared to look through the warm weather in September and October to focus on the prospect for higher gas demand in the heart of the heating season between November and March.
But as the warm weather has persisted it is starting to stretch into the heart of the heating season and forcing a reappraisal of likely winter gas consumption (tmsnrt.rs/2fiEcjm).
NOAA forecasts now show warmer than normal temperatures lasting through the first half of November and average or higher temperatures throughout the core winter months between December and February.
Seasonal heating demand is heavily concentrated in the middle of winter. On average, just 8 percent of total heating demand occurs before Nov. 1 and 20 percent before Dec. 1.
One-third of total demand occurs before Christmas Day, two-thirds before Valentine’s Day, and 90 percent before the end of March (tmsnrt.rs/2fiDGSh).
Warm weather early in the season could therefore be ignored as relatively unimportant but if it persists into the core of the heating season it could have a much more significant impact on total seasonal gas demand.
Warmth will cut gas consumption for space heating and intensify the competition with coal in electricity generation.
Forecasts showing warm weather stretching well into November and possibly beyond have therefore forced a re-evaluation of the supply-demand outlook.
At the same time, the number of rigs drilling for natural gas has begun to rise in response to the earlier increase in prices (“U.S. oil and gas producers stir from hibernation”, Reuters, Oct. 25).
If the increase in drilling is sustained it could help stem the slide in gas production evident since April.
Hedge funds had built up a large net long in natural gas futures and options contracts in anticipation of a tightening of supply and demand and further rise in prices (tmsnrt.rs/2fiCJcU).
The concentration of hedge fund long positions left prices vulnerable to a reversal if and when they attempted to exit from those positions.
With demand now looking softer and supply picking up, it is very likely hedge funds have begun to liquidate at least some of their long positions and increase short positions.
The adjustment in hedge fund positioning over the last week will only be revealed when the next commitments of traders report is published on Friday.
But it is very likely that long liquidation by hedge funds and increased short selling accelerated the drop in prices.
(John Kemp is a Reuters market analyst. The views expressed are his own)
(Editing by Jason Neely)