Yesterday we saw the first withdrawal from U.S. natural gas storage of the fall. Analysts expected a draw of 47 billion cubic feet, but the Energy Information Agency reported a much larger draw of 64 Bcf. This report reflects the impact of the first blast of wintry weather that swept through the week of December 4th. Bulls have eagerly awaited the first withdrawal which usually occurs in November.
The larger than expected draw down was enough to catapult natural gas prices 8% higher within minutes, and the gains held through the close. The market peaked at $5.347/MMBTU and closed the session at $5.298/MMBTU. This was the highest settlement seen since January.
The question now is, where do we go from here? Is this another head fake from an oversupplied natural gas market that has made several attempts at a reversal only to retreat as fast as it advanced? Or are we seeing the first move back to supply/demand equilibrium. The stout withdrawal was eagerly anticipated by all market participants, and it was just a matter of time before we had a spike to the upside. The anticipation had been building for weeks. But all of the rallies so far have faded quickly.
In my opinion the market will continue to be extremely sensitive to short-term fundamentals. Weather, storage, and production as reported week to week will cause range bound market gyrations for at least the next couple months. We have a long way to go before we will know whether we will return in 2010 to the $6-8/MMBTU market that many of the natural gas producers are predicting, or if we are looking at another year of oversupply, and low prices in the $3-5/MMBTU range.
Remember, the last production report showed a decrease in production of 1.4 Bcf per day from August to September. We would need to see a continuation of this trend in the next production report due out at the end of December to believe that we have a solid floor in natural gas prices. One scenario that could lead to a rebound in 2010 is if we see consecutive, significant drops in output due to the massive reduction in rig counts in 2009. That may signal a much lighter injection season in 2010, and a chance to work off excess inventory that has suppressed prices in 2009.
For electricity and natural gas buyers the next 8 weeks will be an important time to watch closely and plan for the next 24 – 36 months.