Colder than normal winter conditions in the US Northeast and Midwest have resulted in above average natural gas storage drawdown during recent weeks. The following chart, courtesy of the US Energy Information Administration, provides a historical context for seasonal working gas in underground storage as of the week ending 17Jan14.
Clearly the colder than normal winter conditions have resulted in above normal withdrawal rates from US underground storage facilities. Several pipelines servicing the US Northeast region have issued operating notices coincident with the high demand. Natural gas prices at key supply hubs are responding, for example front month natural gas futures at Henry Hub (symbol: NG) closing at $5.182 on 24Jan14.
Key question: What’s the potential for continued above normal demand (weather) or curtailed supply (wellhead freeze-offs)?
Wellhead freeze-offs occur when the moisture and/or petroleum liquids freeze up in wellhead or gathering equipment lines. This has been known to occur during prolonged periods of excessive cold temperatures in producing regions. Wellhead freeze-offs have not been a major supply factor as of this writing. A search for operating notices related to wellhead freeze-offs yields little to no data. Hess Energy Marketing reports in their Nymex PM Update of 21Jan14 – “U.S. Gas production declined recently by ~2 bcf/day due to wellhead freeze offs but it is ~1,500,000 dth/day higher Y-o-Y Jan14 MTD despite that. This is a neutral/bearish factor impacting market psychology.”
The National Oceanic and Atmospheric Administration (NOAA) provides a forecast of expected temperature deviation for the Feb/Mar/Apr 2014 window as of 16Jan14. This data suggests temperature patterns for the higher population areas near normal or above normal.
Our review of the fundamental and technical information provides cause to reiterate our view of 11Dec13 – “A substantial band of resistance exists in the $6.11-8.21 range. Expect prices this winter to test the lower band of that resistance range, specifically the $6.11 level. Above the $8.21 level, there is very little resistance, but that test is likely one or two winters ahead of us.” (See http://murphycofutures.com/us-natural-gas-early-stages-of-a-bull-market/)
Recent price action is supportive of the potential for a new bull market emerging in US natural gas prices. NG prices are currently testing the $5.19 resistance level. Notice the uptick in volatility. While yet to confirm sell signals, indicators are beginning to move into overbought territory.
Expect NG prices to potentially test the $6.11 level during the balance of this winter. Adequate supplies and moderating weather are expected to arrest any further price advance this winter.
Murphy & Co’s Natural Gas model is currently flat, holding no positions. To learn more about Murphy & Co’s position models, visit http://murphycofutures.com/position-models/.