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March natural gas rally above $2.60/MMBtu faces headwinds from weather

March natural gas traded higher in the truncated workweek's opening session Tuesday, Feb. 20, in short covering amid growing sentiment of oversold conditions, after the contract's recent decline. At the settle, March futures gained 5.8 cents to $2.616/MMBtu.

Options on March natural gas will expire at the close of business Friday, Feb. 23. The contract will expire at the Feb. 26 settle.

Setting up to take the lead, April futures finished Tuesday 5.1 cents higher at $2.649/MMBtu.

"It now appears as if the April natural gas contract has found value around the $2.60/MMBtu level and the market is at least partially supported by the decline in the rig operating count and by ongoing strength in crude oil prices," Zaner analysts said in a note.

The April WTI crude oil contract closed Tuesday up 22 cents at $61.90/bbl.

Following a 29-rig jump in the week to Feb. 9, the combined oil and natural gas rig count in the U.S. was unchanged during the week ended Feb. 16, holding to a total of 975, according to Baker Hughes Inc.'s latest North America Rotary Rig Count. Oil-directed rigs were up seven on the week to a total of 798, which was up 201 from the same week in 2017. Natural gas-directed rigs were down seven on the week to 177 and were up 24 rigs on the year.

Support, however, is limited, and the rally will likely fizzle as weather forecasts show warming that should deflate demand for heating ahead of a significant ramp-up in demand for cooling. The latest forecasts from the National Weather Service show that for the six- to 10-day period, above-average temperatures will spread across nearly the entire eastern half of the country and below-average temperatures will dominate in the West. A band of average temperatures in the central U.S. will separate the two areas of extremes. The trend continues in the eight- to 14-day outlook, although the heat intensity is lessened across the eastern half of the country.

The outlooks imply that demand over the next weeks will be moderate to low and will allow more natural gas to remain in underground storage facilities as participants look to total working gas supply at the traditional end of the withdrawal season March 31. The natural gas supply currently sits at 1,884 Bcf after a larger-than-expected withdrawal of 194 Bcf was reported by the U.S. Energy Information Administration for the week to Feb. 9.

An early look at expectations for the upcoming storage report due out at 10:30 a.m. ET on Thursday, Feb. 22, covering the week to Feb. 16 shows a range of withdrawals from 110 Bcf to 119 Bcf, which would compare with a 92-Bcf pull reported for the same week in 2017 and the 145-Bcf five-year-average withdrawal. The deficit to the closely watched five-year-average storage level would be trimmed by a drawdown within market expectations.

From March through May, however, warmer-than-normal temperatures are anticipated across the southern half of the U.S., while below-average temperatures are eyed for the northern half, according to the latest monthly outlook The Weather Company issued Feb. 20.

Cold weather in March could drive support back into the market should withdrawal rates ramp back higher. The EIA said that if net withdrawals from working gas stocks match the five-year average for the remainder of the withdrawal season, working gas stocks will total just 1,269 Bcf by March 31, which would be 25% lower than the five-year average and the second-lowest end-of-heating-season level reported since 2010. Working gas stocks ended the 2013–2014 heating season at 837 Bcf, which is the lowest reported level during that period.

"I think winter is over for the most part, however, we may see another period of cold temperatures before it is finally put to bed," FX Empire analyst James Hyerczyk said. "Any rallies at this time are likely to be treated as opportunities to increase short positions at more favorable price levels," he said.

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.