The rally in January 2017 natural gas stalled Monday, Dec. 12, as sentiment of overbought conditions drove a rethinking of prior gains to a level not seen since December 2014. Following its finish 5.1 cents higher at $3.746/MMBtu ahead of the weekend, the contract held in negative territory throughout the week's opening session, sinking as low as $3.472/MMBtu and settling 23.9 cents lower at $3.507/MMBtu.
Fickle weather provided the backdrop for the market's struggle to hold the upside, with the latest forecasts from the National Oceanic and Atmospheric Administration pointing to a lessening of demand support for the longer-range eight- to 14-day period. The outlook shows below-average temperatures only in the West.
The six- to 10-day outlook remains supportive as cold weather is slated to spread across the majority of the country, leaving only a portion of the Southeast and Gulf under average and above-average readings.
Cold weather in the week to Dec. 9 and the subsequent cold forecast for the upcoming six to 10 days support the anticipation of larger withdrawals from the natural gas supply, reflecting a tightening of the supply demand balance.
Market analysts and traders looking to the inventory report due out at 10:30 a.m. ET on Thursday, Dec. 15, see draws ranged from the low 120s Bcf to as much as a 140-Bcf pull. This will compare against a 79-Bcf five-year average withdrawal and the 46-Bcf pull reported in the corresponding week in 2015.
Natural gas inventories will shrink from the current level at 3,953 Bcf and storage overhangs would be substantially reduced. Total storage stands 51 Bcf above the year-ago level and 254 Bcf above the five-year average.
A turn to milder conditions in the eight- to 14-day period is likely to allow for a brief step lower in the rate of storage erosion, providing the market some reluctance to move sharply and sustainably higher, however market participants suggest that bullish sentiment remains intact.
Longer range, winter weather is expected to erase storage overhangs by as early as the end of December, and analysts and traders are revising lower their end-of-March storage projections in part due to weather's impact on natural gas production.
"We previously expected US natural gas production to rebound to 72.5 Bcf/d by year-end, but as we get closer and closer to the end of the year, extreme weather conditions in the next two weeks will see delay in production, and we have revised lower our year-end target to 71.5 Bcf/d," HFI analysts said. "The delay has us revising higher the structural imbalance in the market for Q1 2017, and as a result, storage draws will be higher than we originally expected leading to lower EOS target for April 2017."
Day-ahead trades shed considerable value after pre-weekend runs higher. Natural gas futures' retreat helped the decline.
Transco Zone 6 NY shed nearly 40 cents to an index below $3.65, and Tetco-M3 trades were about 15 cents lower to an index below $3.40. Henry Hub traded nearly 20 cents lower to an index near $3.55, Waha trades were about 15 cents lower to an index near $3.40, and Chicago traded similarly lower to an index near $3.60. At the SoCal Border, a loss of more than 10 cents brought the index to near $3.55, and PG&E Gate shed about 15 cents to an index below $3.70.
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