Natural Gas Bull Case Questioned Amid Sizable US Supply Withdrawal

Flared natural gas is burned off at Apache Corporations operations at the Deadwood natural gas plant in the Permian Basin, Garden City, Texas, on Feb. 5, 2015. Spencer Platt/Getty Images

Natural gas futures failed to hold early gains on Dec. 2 after the U.S. government reported a larger-than-expected supply withdrawal.

According to the U.S. Energy Information Administration (EIA), domestic natural gas inventories declined by 59 billion cubic feet in the week ending Nov. 26. That’s slightly larger than the median estimate of 57 billion cubic feet. Last week, the EIA reported a supply withdrawal of 21 billion cubic feet.

In total, U.S. natural gas stockpiles stand at 3.564 trillion cubic feet, down 375 billion cubic feet from the same time a year ago. That’s also 86 billion cubic feet less than the five-year average of 3.65 trillion cubic feet.

January natural gas futures rose to an intraday high as $4.335 per million British thermal units (Btu) on the New York Mercantile Exchange early on Dec. 2 but fell to $4.056/MMBtu, down 4.7 percent, to extend a week-long sell-off. Natural gas is poised for a weekly slide of about 16 percent, but the energy commodity is still up about 68 percent year-to-date.

Market analysts note that the sell-off has resulted in tremendous losses for speculators.

In recent sessions, there has been a focus on the “widowmaker” spread between March and April futures after it slumped to a 20-month low amid changing weather forecasts. This market metric emphasizes how tight supplies will be at the end of winter.

A Chesapeake Energy natural gas well pad rests on the hill in Litchfield Township, Penn., on Jan. 9, 2013. Brett Carlsen/Reuters

Moreover, there has been a sizable decline in investors’ premiums for next year’s summer contracts. Traders, market strategists note, are reassessing 2023 deliveries and the outlook for supply and demand.

This could be good news for consumers’ home heating bills, since about 40 percent of the country’s electricity supply is powered by natural gas. In October, U.S. electricity prices surged 6.5 percent year over year.

A Weather-Driven Downturn

December is anticipated to be warmer than average in most parts of the United States.

The weather outlook from The Weather Company for this month shows that temperatures will be above average, stretching from Florida to the Mid-Atlantic to the West Coast. The only places that are forecast to experience colder than average temperatures are closer to the Canadian border, including in western Washington, the northern Great Lakes, and New England.

Meteorologists say that the mild December forecast is being driven by La Niña and a strong polar vortex.

If these conditions persist in the United States, industry experts prognosticate that warmer weather could extend well into winter. It’s this belief that has fueled the sell-off in natural gas markets.

“This is purely a weather-driven downturn. ... [Forecasts] currently indicate average to above-average temperatures across the U.S. That, in turn, has reduced the expected number of heating degree days weighing heavily on Henry Hub prices,” Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, told CNBC.

Overseas, weather patterns have signaled warmer-than-usual temperatures in Europe, although meteorologists are monitoring chillier patterns forming later in December.

Is the Bull Case for Natural Gas Over?

Have the bears taken over the natural gas market?

This summer, it had appeared that the United States would be undersupplied heading into the colder months. However, because autumn months were warmer than expected, stockpiles were able to be refilled, said John Kilduff, partner at Again Capital.

“Storage levels are now in-line with the five-year average. The relative warmth last week, this week, and in the forecast for mid-December has just wrecked the bull case,” he said.

A woman stops to photograph the New York Stock Exchange as snow begins to fall during the morning commute in New York City, on Feb. 7, 2018. Brendan McDermid/Reuters

Emily McClain, North America gas markets analyst at Rystad Energy, notes that the latest figures suggest “bearish weeks ahead.”

“Near-term weather forecasts are suggesting bearish weeks ahead, and storage inventories have returned to normal levels (just 1.6% below the 5-year average) in recent weeks,” she said in a note. “The combined effect has driven spot and futures prices further down.”

However, liquefied natural gas (LNG) exports are projected to remain close to the 10 billion cubic feet per day range for the rest of 2022 and winter season, “so we will likely see prices remain elevated and within the $4.00–5.00 per MMBtu range,” McClain said.

Data compiled by commodity consultants Kpler show that U.S. LNG exports totaled 6.1 million tons last month, up from 5.96 million in October. That’s the most since May.

For the European market, heating demand is growing, and fears over tight supplies haven’t dissipated. Commodities experts are still anticipating tightness in European gas levels that could leave prices seasonally high for much of 2022.

“Concerns over low gas storage levels in Europe have not eased and this is likely to be a concern through the winter, as heating demand only grows,” said Warren Patterson, the head of commodities strategy at ING, in a note.

“These worries over tightness should mean that prices remain elevated, yet volatile for the remainder of this year and into early next year. We expect that European gas prices will start to ease once we are past the peak of winter demand, although given that Europe could finish winter with historically low inventories, we still believe that prices will remain seasonally high over much of 2022.”

Europe has been able to garner more LNG cargoes. Kpler numbers show that Europe imported 6.29 million tons in November, up from 5.96 million in October. This was also the largest amount since April.

In Europe, the average residential consumer’s electricity bill has climbed 13 percent from a decade ago. Any easing could reduce pressure on household energy costs.

While crude oil appears to be driven by concerns over the Omicron variant, natural gas prices are trading on the present supply-and-demand fundamentals.