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My two cents: Storage, colder weather push gas futures up

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Article from Restructuring Today January 14, 2013: NYMEX February natural gas futures moved higher Friday, January 11 in follow-through buying after the bullish storage report a day earlier, analyst Jackson Mueller reported. The front month added 13.4 cents to close at $3.327/MMBTU. Weather pushed gas future higher as forecasts for the next two weeks showed portions of the Northeast with below-average temperatures. That would cut into storage levels that have been well above the five-year average. 

My two cents

What drives natural gas prices?  Is it as simple as the weather?

Last October and early November, temperatures for the East Coast were COOOOOOLLLLDDD. Out of the last 118 years, November was the 33rd coldest month for the Northeast Region (Pennsylvania to Maine) and even colder for the Southeast (17th coldest). What happened?

Natural gas prices rose from spot prices for the next day to long-term prices for 2015 and beyond. Prompt month* gas rose from $3.57 on November 12 to $3.90 on November 23 when the weather turned. In fact, December was one of the warmest months on record, especially until the cold snap after Christmas. Prompt month gas then fell to $3.31 on December 17.

The market moved sideways until mild January weather pushed prices to another low of $3.11 on the 9th. We almost hit 70 degrees in Pittsburgh, Pennsylvania, but of course I was stuck inside watching a 5th grade basketball game in an overheated gym. It is now getting cold again and the prompt month is back up to $3.43. Prices for 2015 are also up by $0.09 due to cold weather for the next two weeks.

So what’s the lesson? We can discuss that natural gas prices are driven by shale gas economics, the U.S. economy, EPA regulations and liquefied natural gas exports (LNG exports) and that these factors are all driving long-term pricing trends, but short-term volatility is driven primarily by the weather.

If only we could figure out a way to predict weather months or years in advance. :)

*Prompt month means the nearest month of delivery for which NYMEX futures prices are published during the trading month.

Posted: January 24, 2013