Winter Severity Doubts Add to Wild US Gas Price Swings

Rollercoaster moves in the US natural gas market over the past few weeks are underscoring traders’ uncertainty about whether a frigid winter, muted output and rebounding demand will send prices rocketing higher in the coming months.

 

Gas futures settled more than 7% higher on the 6th October, mimicking gains in oil and equities.

 

But just two weeks ago, prices posted their biggest one-day loss in almost two years. Historical volatility has surged to levels not seen since late 2018, and implied volatility, a measure of how dramatic price swings may be going forward, is the highest in data going back to 2010.

 

Bullish bets on US gas have soared as traders wager on lacklustre production and surging demand heading into winter. Liquefied natural gas exports are rising as consumption recovers from pandemic-driven lockdowns, and as terminals restart after storm-related outages and maintenance.

 

Meanwhile, shale output remains subdued as drillers heed investor calls for financial restraint after this year’s oil-price crash.

 

Outsize moves in risk assets amid geopolitical turmoil have magnified the volatility in gas, while a hyperactive hurricane season has disrupted offshore production and LNG exports and triggered blackouts which curtailed gas demand for power generation.

 

“You’ve had a volatile market, but this is the icing on the cake,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. “Guys were stepping in to pick at the bottom.”

 

But as is often the case with the gas market, it all hinges on the weather. Although a La Niña pattern has emerged, which could lead to a chilly winter in the northern US, brutally cold conditions are far from certain. A mild December, January and February would limit gas demand for heating and curb withdrawals from underground storage, leaving the market oversupplied heading into spring.

 

Almost half of respondents in a Bloomberg News survey of traders and analysts late last month said winter prices could rise higher than US$3 per million British thermal units, perhaps testing US$4 or more, a level not seen for years.

 

Hedge funds are the most bullish on gas prices since 2017. Gas futures jumped 17.7 cents to US$2.615 in New York on the 6th October, the biggest gainer among major commodities. Shares of gas producers including Southwestern Energy Company also climbed.

 

With temperatures not expected to be cooler until late October, EBW AnalyticsGroup CEO Andy Weissman said gas traders are closely watching the recovery process of Cameron LNG, a Sempra Energy-owned export terminal in Louisiana that’s restarting after shutting due to Hurricane Laura in late August.

 

If cold weather doesn’t materialise, money managers will jettison their bullish positions, leading prices to plummet.

 

“A dime comes easy in the natural gas market these days,” said Gary Cunningham, a director at Tradition Energy. “Money is willing to move in and out of the market so quickly.”

 

Source: Rigzone