Happy Friday
What a week. The NYMEX January front month contract is up $3.28 US/mm Friday close to $3.73 last today (1pm), a rally of 45 cents. There are various explanations: cold weather, big storage withdrawals, and/or growing LNG demand.
Let’s break it down. Most of this rally was in the front months so I don’t believe that LNG demand is the reason. Yes, there will be an increase in demand as the year progresses but it didn’t happen this week all at once. These facilities take a long time to become fully operational, which means that producers can plan. If LNG demand growth was the motivation for this rally, the back months would have rallied more than this January.
In terms of storage, yes, last week’s withdrawal was larger than expected but we still have 3.8% more gas in storage than the five year average for this week of the year. The projections for the end of the withdrawal season have all been for somewhere between 2000bcf and 1900 bcf. Okay, well below the huge 2259bcf on April 5th,2024 but 2000 bcf is still above average. Traders are trying to figure out if we have enough gas in storage for this winter, but that day is coming soon.
Finally, December weather so far has been cold but the forecast after this weekend is for lower Heating Degree Days. The expectation is for perhaps some colder weather perhaps starting January 3rd but that is a “perhaps”. I would wait for some better information before buying with both hands like the NYMEX traders see to be doing. The fact is that by the time we get to the second week of January, we will have a much better idea of what the winter will be. The forecast is for warmer than average, but with a few cold snaps like last January. Okay, a few cold snaps in a row will add up but we won’t know until it happens.
My final point will be that this is December and traders are trying to balance their books this week so that they don’t have to work next week. Not just because they want to be with their families for Christmas but also because the markets will be thin and pricing will be poor. This rally might be them buying their January supply.
I will conclude to say that a seasonality study found that 80% of the time the winter high was made by the end of December.
Regardless, I hope that your book is balanced for January and you get to relax at home with the family. Don’t think about Natural Gas too much and focus on the important things. I will be watching the market just in case something happens.
Happy Holidays from the RiteRate team