Oil prices have fallen sharply in November, but natural gas’ rise has been even more striking with prices for the heating fuel having soared by more than 30% for the month to date, recently touching their highest level in more than four years.
December natural gas NGZ18, rose 18% to settle at $4.837 per million British thermal units on Wednesday. That was the highest settlement since Feb. 26, 2014, and the biggest one-day percentage rise in more than 14 years, according to Dow Jones Market Data. Prices fell back by 17% on Thursday, and settled up almost 6% on Friday to $4.272, for a weekly rise of nearly 15%.
The divergence in oil and gas prices could mean that “some of the players who have been burned in oil have turned to natural gas as a means for trying to recover their losses,” says Colin Cieszynski, chief market strategist at SIA Wealth Management. “Natural gas is a small market,” he adds, so a “large group of new entrants jumping on the bandwagon at once has pushed up the price. The rally may also be taking on a life of its own, and appears to be triggering a short squeeze.”
Outside factors also contributed to the wild price action. There is speculation that the hedge funds that had been long crude oil and short natural gas for the winter were forced to liquidate their positions to meet margin calls and end-of-the-year redemptions.
Natural gas is still 30 percent higher in November, and more cold forecasts could send it higher again.
“There’s still a bullish looking chart, but this recent parabolic move higher had to be processed and really retraced for the market to normalize,” said John Kilduff, partner with Again Capital. He said gas prices could fall to support at $4 and then return to the $3.50 per mmBtu level, unless another cold wave is expected.
U.S. Energy Information Administration (EIA) Weekly Storage Report
According to the EIA, U.S. natural gas stockpiles rose by 39 billion cubic feet in the week-ending November 9, exceeding the 34 billion cubic feet rise analysts and traders had forecast. Furthermore, the increase was more than double the injection for this time of year.
Nonetheless, total storage remains about 16% less than normal for this time of year. This news should continue to underpin prices until it goes away. If the winter is cold enough or if below average temperatures continue into the spring, we may even begin the summer heating season with a deficit.
The large build during the week-ending November 9 indicates that the market is well-supplied so any major change in the weather to the warm side could lead to a steep drop in prices. This week, investors will be focusing on the weather forecasts for the last week in November and the first week in December.