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Since the December 2021 contract took over the prompt slot on the NYMEX natural gas curve it has essentially been on a one-way train lower. Over the past 11 trading sessions, the December contract has fallen $1.00/MMBtu. The same is logically true of the Bal Winter strip which has fared only modestly better at -$0.92. One common argument made for wind coming out of the sails of the Fall rally is a normal Dec-Feb (DJF) weather forecast. Numerous commodity weather groups have forecasted such. This same period last year was also normal in aggregate, and 2 Tcf was withdrawn from storage. From current inventory levels of 3.6 Tcf, a 2 Tcf peak winter drawdown would not be worthy of material upside price risks. Drawing such a simplistic conclusion misses one critical point. Not all normal winters are created equal.

Looking back at last winter illustrates how the path to normal can materially impact the natural gas market. There are clearly no guarantees on this year’s path, and pre-emptively determining what is in store for the winter is a risk often not worth taking. Market bulls who got longer the Mar/Apr spread each of the times it retreated to +$1.20 might tell you as much.

Last December was above normal in most all major metropolitan areas in the lower 48. While the Southeastern U.S. was modestly below normal, the only state in this region to experience a delta versus normal (30yr) of greater than 2 degrees was Florida, which simply meant one might need to wear a pair of pants to the beach rather than a pair of shorts. Cumulative heating degree days (HDDs) for December 2020 were 802, or 38 fewer than the 30yr normal.

Rolling forward to January of 2021 the warm pattern intensified. The first month of the year, and peak winter heating month, amassed 864 HDDs or 65 fewer than normal. When the months of December and January are consecutively warmer than normal risks of dangerously low inventory are all but gone. This is not to say that February and March cannot create some material surprises for a market that has given up on winter, and last year was certainly one of those instances.

February of 2021 is etched in the memory of most all Texans, many Oklahomans, and likely a meaningful number of individuals and businesses in Louisiana and Arkansas as well. February of 2021 flipped the script on the prior two months and came in 103 HDDs colder than normal. Almost to the number this offset HDD losses in Dec and Jan. As all those who suffered through winter storm Elsa remember, the cold was intense yet temporary, although the impacts were longer lasting. The period from Feb 6-16 effectively encapsulated all of the colder than normal days. The first 5 days of February were 5 HDDs warmer than normal and from the 17th to the 28th temps were such that population-weighted HDDs were 9 greater than normal.

Intense cold like that experienced in mid-February 2021 undoubtedly creates a steep increase in the demand for natural gas. However, there are a couple of limiting factors that come into play when all of the cold for a 3-month period is squeezed into a minuscule period of time. First, the ability for stored volumes to be withdrawn to meet elevated demand is limited to daily capabilities by facility. Secondly, and much understood by those with short interest in the daily market last February, are price changes that accompany such intense cold in search of all available price elastic demand.

To assume that a normal DJF weather forecast for this year is equal to that of last year is a gross miscalculation of what is possible over the peak winter period. According to those same seasonal forecasts, Dec ’21 and Jan ’22 are forecast to be 100 HDDs colder than the same two-month period last year. With current inventory in the lower 48 sitting at a 309 Bcf deficit to last year, and with a colder end to November forecast, the price risk/opportunity over the next 2.5 months is material. Inventory in Europe remains extremely low despite adept utilization of media outlets by Vladimir Putin, plus on again off again actual increases in Russia flows to their Western neighbor. Combined, these two factors are not currently factored into a market that has traded as if winter is nothing to be concerned about. Of course, the front of the curve is still one day’s trading range of the $5.00 mark, however, today’s note is meant to highlight directional risks/opportunities, as well as the magnitude of potential moves, not an outright call on a flat price.

Also contributing to apathy at front of the curve is the fact that the last two years with a normal DJF in recent history 2017/2018 and 2018/2019 proved to be non-events from a price perspective when all was said and done. In 2017 December was colder than normal but the starting inventory level was 200 Bcf higher than this year, and almost all of the extreme cold, which offset extended periods of warmth came around the Christmas / New Years’ holiday. In 2018 pre-winter inventory was at an all-time low and November was significantly colder than normal causing a spike up towards $5.00/MMBtu. However, December 2018 ended up being the 12 warmest in the past 71 years, January was normal, and by the time a cold February came to pass the market had already given up on a stock-out scenario. Please note that in 2018 the production growth rate was peaking, and contrary to this year the supply side was well armed to counter mother nature.

In summary, our expectation is that a normal to slightly colder than normal December could easily generate average weekly withdraws of 150 or more. A 600 Bcf or greater drawn down in December would not be a comfortable situation for market bears, or those content to sit on short interest believing in the normal winter story without considering the many nuances which can lead to a normal aggregate period. Of course, mother nature is not easily predicted, and a warm balance of November and December would bring on more of the same pricing dynamics as those observed in the past 11 trading sessions. It is arguable that the tone could be set for the winter over the next couple of weeks with forecasts calling for normal temps in each of the final 2 weeks of November, and enough HDDs in Upper Midwest and Northeast population centers to spur a stronger spot market. This same period last year was significantly warmer than normal nationally, and literally the only location on the map with below normal temps was the Oregon coast.