Today is Remembrance Day. I hope you had the opportunity to take a moment today to reflect on the sacrifice of those who gave their last full measure of devotion for our country. It puts talking about the natural gas market into perspective.
However, with that in mind, allow me to proceed: NYMEX opened the week with a huge rally. The December front month contract was up 27 cents at one point. Last trade $2.94 USD/mm. Chart from Trading View:
The rest of winter strip was up 22 cents to $2.97. Next summer strip was up 14 cents to $3.05.
There were three explanations for this rally. First, the forecast for the rest of November has been downgraded from above average temperatures to just average, which means we will begin withdrawing gas from storage sooner than we expected last week. Second, production output has averaged 100.1 bcf/day in November, down from 101.3 bcf/day in October. Third, this might be a short covering rally.
If I had to grade these three theories; the strength and speed of the rally would suggest a short covering rally. We all knew that eventually winter weather would happen so why the market would suddenly notice this today is a bit suspect. Same with production, we are waiting for producers to address the normal increase in seasonal demand, so we shouldn’t be surprised when it finally happens.
The CFTC (Commitment of Traders) report suggests that financial traders were short and got squeezed. The change in the weather forecast might cause speculators to suddenly change their minds and if they all tried to exit at the same time it would produce a sharp rally like we saw today.
Furthermore, Reuters said that the cash price at Henry Hub is at a 25-year low. The Dawn Daily Index was also quite low over the weekend. It would be quite surprising to see cash market fall to new low while financial futures rally 27 cents.
I am going to be prudent and wait until tomorrow to confirm this because today’s cash prices will be reported tomorrow and we will have a better idea.
[WFG]
But don’t forget that in the natural gas market, anything can happen.