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Natural Gas surge increasingly at risk of reversing

Commodities 6 minutes to read
Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  An early cold snap has left residents of the US northeast shivering and sent the price of natural gas way higher. But forecasters say the big chill won't last much longer, and neither should the inflated prices.

Natural gas has continued its surge higher today, almost reaching $5/term before running into some profit taking. At the current price of $4.63/mmbtu it is up by more than 40% during the past two weeks. It is being carried higher by strong momentum on the combination of unseasonal cold weather across the US northeast raising short-term concerns about production being disrupted due to freezing of the well heads together with stocks lingering at a seasonal 15-year low ahead of the withdrawal season that is about to kick off within the next couple of weeks. 

However, once temperatures return to normal the front end of the futures curve could risk a major setback. 
natural gas chart
Source: Saxo Bank
According to the Tropical Tidbits the cold blast across the US northeast is expected to last at least until November 23 before returning to normal. 
temperature anomaly
Source: TropicalTidbits.com
The problem with a cold blast so early and well before the peak demand season in January and February has raised concern about the availability of gas in underground storage facilities towards the end of the withdrawal season in late March.

This worry is clearly seen in the spread between the last winter month contract of March-19 and the first spring contract of April-19. Earlier today it reached $1.75/mmbtu before retracing to the current $1.32/mmbtu, still a colossal spread of  more than 30% between the two contracts.
Natural gas spread between NGH9 and NGJ9
Natural gas spread between NGH9 and NGJ9, source: Bloomberg
A year of record production, but also record demand from domestic consumption and rising exports, has left storage levels precariously low with just a few weeks of injections before the withdrawal season begins. The next weekly storage change report is due Thursday at 15:30 GMT and a relatively small injection of 32 bcf is expected. 

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