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February 2018 natural gas futures' rally shows signs of exhaustion

While breaching resistance at $3.00/MMBtu Friday, Dec. 29, posting a three-week high at $3.008/MMBtu, February 2018 natural gas futures gave back the lion's share of the day's gains as the rally begins to show signs of exhaustion. The contract settled just 3.9 cents higher at $2.953/MMBtu.

Current and midrange weather outlooks continue to support the upside. A cold weather pattern is expected to persist through the weekend, the National Weather Service, or NWS, said in its short-range forecast discussion issued early Friday. Much of the country east of the Rockies has already been in the grip of an arctic air mass, while another reinforcing shot of arctic air is currently taking shape over northwestern Canada as the associated strong high pressure system is forecast to slide southeastward and dominate the weather pattern across the U.S. mainland through the weekend, the NWS said.

Further ahead, the six- to 10-day weather forecast from the NWS shows below-average temperatures across the entire eastern half of the U.S. and across portions of the north central and Northwest. The cold continues to linger across the majority of the country in the eight- to 14-day period although the intensity of the cold softens.

As cold weather drives a surge in demand for heating in the residential and commercial sectors, the negative impact on the natural gas supply supports rising prices as the inventory of natural gas in storage facilities across the Lower 48 gets worn away.

Following a 182-Bcf withdrawal from inventories in the cold week to Dec. 15, the U.S. Energy Information Administration reported a net 112-Bcf withdrawal from natural gas inventories during the week ended Dec. 22 that was slightly above consensus estimates that called for a 109-Bcf drawdown from stocks and the five-year-average pull of 111 Bcf, but was well below the year-ago withdrawal of 233 Bcf.

The pull brought total U.S. working gas supply to 3,332 Bcf, or 62 Bcf below the year-ago level and 85 Bcf below the five-year average storage level of 3,417 Bcf. The week's withdrawal reflected weather that generated 19.2% fewer heating degree days than average and 27.3% fewer than the same period a year earlier.

Withdrawals are expected to climb into the 200-Bcf range over the next three or four weeks as the cold weather supports rising demand.

Ultimately however, the sustainability of the upside will be determined by the longevity of cold weather, and outlooks for the long-range period from both the NWS and The Weather Company show moderating weather that should sap demand, trim storage withdrawals and allow the market to revisit the downside.

Additionally, while the natural gas rig count declined week on week in the week to Dec. 29, natural gas production continues to climb. Gross wet gas production in the U.S. increased 1.25 Bcf/d to 93.10 Bcf/d in October from 91.85 Bcf/d in September, positioning total U.S. wet gas production almost 5.42 Bcf/d, or 6.2%, above levels reported in October 2016, the EIA said in its latest "Monthly Crude Oil and Natural Gas Production" report released Dec. 30.

Trade in the day-ahead markets was revised for Monday, Jan. 1, and Tuesday, Jan 2, delivery to accommodate for the fresh month and New Year. Prices were supported by stronger demand anticipated coming off of the long holiday weekend, with cold weather and some pipeline capacity issues adding to the upside pressure.

Transco Zone 6 NY deals were nearly $15.55 higher to an index atop $30.95, Tetco-M3 gained a similar amount to an index atop $30.65, Henry Hub traded about 60 cents higher to an index near $3.60, Chicago climbed nearly 65 cents to an index near $4.65 and Waha advanced nearly $1.15 to an index atop $4.15. At the SoCal Border, a near 65-cent gain brought the index near $3.65, while PG&E Gate added nearly 15 cents to an index atop $3.15.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power, natural gas index prices, as well as forwards and futures, visit our Commodities Pages.