NYMEX February gas futures price surges $2 in technical move as contract expires

Natural gas futures prices at the US Henry Hub notchedtheir largest single-day gain since the 1990s in Jan. 27 trading as the expiring February contract surged on a likely technical market move, analysts said.

In late-session trading, the February gas contract climbed as high as $7.40/MMBtu before expiring at $6.265/MMBtu marking a nearly $2 price increase from the prior-day settlement.

Market analysts were in agreement that the move was likely a technical one.

"I don't think anything in the fundamentals shifted so dramatically to cause that move," Daniel Myers, senior market analyst at Gelber & Associates, said by telephone Jan. 27.

"We saw it accelerate in the last 30 minutes of trading – it was mostly a financial phenomenon, rather than a reflection of what is happening in the physical market," Myers said.

Stephen Schork, principal of the Schork Report, agreed. "This is a classic short squeeze," he said.

"Clearly you've got somebody or a lot of somebodies on the wrong side of the trade," Schork said. "Who's to say that it isn't a hedge fund that had a massive position, but clearly it was the all-time squeeze of squeezes."

Steep backwardation along the NYMEX futures curve also offered support for a technical interpretation of the Jan. 27 market move. Futures prices for March, April and May settled in a relatively tight range from the mid-$4.20s to the mid-$4.30s/MMBtu – a gain of just 20-25 cents on the day, data from CME Group and S&P Global Platts showed.

Jay Levine, independent analyst and principal at EnerJay, noted the relevance of the February contract's expiration date on Jan. 27 – a key factor that likely played a critical role in the market's sharp move.

"Someone was net short on February natural gas on termination date – they have to either make delivery or cover," Levine said.

While analysts were in agreement over the mainly technical causes of the market's move, supply-demand fundamentals have also been on shifting ground recently.

Supply, demand

Updated forecasts from the National Weather Service on Jan. 27 showed colder temperatures enduring into mid-January keeping heating demand elevated as domestic production weakness continues and US inventory levels dwindle.

Over the next week, the weather service forecast shows a 50% to as much as 80% probability for below-average temperatures across a wide swatch of the central US, Texas and the Southeast in a forecast reminiscent of last winter's polar vortex event.

In the agency's eight- to 14-day forecast, the colder weather is expected to shift east, with slightly lower probabilities for sub-normal temperatures in the Northeast and along the Eastern Seaboard states.

Weaker gas production recently could also keep the domestic market in tight supply over the days ahead as colder weather and strong heating demand continue. After tumbling at the start of the new year, US gas production is down over 4 Bcf/d from its December high to average just 92.2 Bcf/d this month. More recently, output has continued sputter into the mid-91 Bcf/d range as freeze-offs in the Permian and the midcontinent exacerbate the decline.

The Energy Information Administration on Jan. 27 also announced its largest withdraw yet of the current heating season at an estimated 219 Bcf pulled from inventory. The current forecast shows outsized withdraws continuing over the next two weeks, potentially cutting stocks to a more than 190 Bcf deficit to the five-year average by early February, data from S&P Global Platts Analytics shows.