It was a pretty volatile Wednesday in the natural gas market: the NYMEX October front month opened at $2.31 USD/mm, reached a high of $2.37, but sold off in the afternoon to close at $2.29.
While it is too early to declare that this decrease is the start of a broader trend, we will get a better idea of the market’s direction tomorrow when the EIA’s storage report comes out. The expectation is an injection of +57 billion cubic feet. This would be higher than the actual injections from the past few weeks, but it’s a reasonable expectation during a time of mild temperatures and low demand right now, so storage is the only place it can go. Enbridge recently reported that Dawn storage is 86.5% full. This is a comfortable amount of gas at this time of year, but they’re still going to cram as much gas in as they can to be prepared for winter.
Let now talk about interest rates and I am going to frame this with “Buy the rumour, sell the news”.
Buy the Rumour
The stock market has been rallying in anticipation of an interest rate cut and finally after all the waiting, the Federal Reserve announced today to do just that.
However, Chairman Powell cut the US benchmark rate by .50% and the market was expecting a .25%, This was a bit of a surprise. Initially the stock market loved the news and rallied… however by the end of the day, the SP500 was down on the day.
The ‘market’ has been anticipating interest rates cuts for a while. To keep the whole economic argument simple here, let’s just think about residential real estate: lower interest rates ought to stimulate the real estate market (lower rates means lower mortgage payments which means you can buy more house for your money). The problem is that people have been buying in anticipation of the cuts.
Sell the News
Now that the Fed has cut rates, market participants will ask themselves ‘Why is the Federal Reserve cutting rates? Why 0.50%? Is Powell worried about something? What am I not seeing?’ The answer is Recession. I’m not saying that we are already in a recession but rather the market will start to really think about what a recession will look like. We are already seeing job market weakness but what if the jobs market gets worse?
Let’s go back to my residential housing analogy: yes, mortgages are cheaper, but if there are layoffs in the economy, then there are less people buying houses, so the prices go down.
What does this have to do with natural gas? Well, a recession is a systemic problem and affects every part of the economy. How is your business impacted by a recession? [WFG FM}