Market Overview

Natural Gas Stocks Take Off Despite Calls For Warmer Weather

Natural Gas Stocks Take Off Despite Calls For Warmer Weather

Natural gas prices are firmer on Tuesday, with the forward one-month February futures currently up 19.9 cents at $3.302 a million British thermal units on the New York Mercantile Exchange.

Natural Gas Stocks Head Northward

Along with the increase in natural gas prices, natural gas stocks are also rallying, with the VelocityShares 3X Long Natural Gas ETN linked to the S&P GSCI Natural Gas Index Excess Return (NYSE: UGAZ) advancing over 15 percent. The VelocityShares 3X Long Natural Gas ETN linked to the S&P GSCI Natural Gas Index Excess Return (NYSE: DGAZ), which is an inverse ETN is plunging over 16 percent.

Bearish Weather Forecasts Ignored

The move has come despite weathermen predicting warmer winter weather, with an increased probability for above normal temperatures for most of the United States, through mid-January. ETF Trends, citing the Climate Prediction Center, said only the Pacific Northwest and parts of the far Northern Great Plains are likely to see below-normal temperatures through January 18.

Natural gas is used in some homes for heating. So, the probability of warmer weather dampens the demand outlook for the commodity, which is bearish for prices.

However, there are views that even in a normal winter season, higher demand for natural gas to heat homes and by power plants along with lower production will chip away inventories and in turn boost prices.

Bargain Hunting In The Works?

Natural gas prices had hit a two-year peak of $3.754 a million British thermal units on December 29, with the rally fueled by demand worries. However, since then, the commodity has lost about 66 cents ahead of Tuesday's session, dropping to its lowest level in more than a month.

Whispers Of Inventory Drawdown

The Energy Information of Administration is set to release its weekly natural gas inventories report on Thursday. Traders are factoring in a deeper drawdown in inventories. Last week's report showed that natural gas stockpiles fell by 49 billion cubic feet to 3,311 billion cubic feet in the week ended January 5, 2017.

Analyst Sees No Supply Scarcity This Winter

Johnson Rice analyst John Rowan, when contacted by Benzinga, had this reason to offer for Tuesday's spike. Rowan believes traders are making adjustments to not bet on colder weather for the balance of the withdrawal season. The analyst refuted claims that there is scarcity of natural gas this winter.

Regarding the effect of the incoming Trump administration, Rowan sees a likelihood that potential shifts in U.S. energy policy will affect energy prices. Saving on regulatory costs would be significant, and while offshore drilling should benefit most, "Onshore headwinds like pipeline restriction will go away," Rowan commented, "so transportation costs will go down."

Rowan thinks the real move in natural gas prices may come this summer when injections or replacement will be much lower than the five-year average. The analyst attributed this to massive Mexican demand and declining imports from Canada and LNG/Petchem ramp up on the Gulf Coast. Rowan warned that there would be undersupply of natural gas next winter unless it goes to $5, where there would be adequate supply response.


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