Up, Up and Away -- Natural Gas Lingers at the Top

April 19, 2013 11:15 AM


The May 2013 natural gas contract ended the week at the high end of its range. EIA data showed the first net injection into storage last week, but while this is positive news, the long view still has the national supply over 30 percent below year-ago and four percent below the five-year average.

As traders look to cash in on long positions, these higher prices may inspire production increases which would help the supply grow. This could place downward pressure on natural gas futures. According to the Short-term Energy Outlook, "EIA expects the Henry Hub natural gas spot price, which averaged $2.75 per million British thermal units (MMBtu) in 2012, will average $3.52 per MMBtu in 2013 and $3.60 per MMBtu in 2014".

EIA also expects the first nine months of 2013 to price natural gas above the same period in 2012. This round of profit taking from winter's long tail will not last forever. Natural gas pricing will come down when the weather allows, and traders exhaust upside action.

More cold air is forecast -- again -- for next week and drawdowns to the national supply may continue for home heat for another week or two. But once the spring warm-up begins in earnest, we expect natural gas futures to calm down a bit and establish a range closer to $4.00/mmbtu. After racing upward this week to end Friday at $4.404, it will not take long for prices to correct. We have observed regular increases and declines greater than a dime in a single move, and have no reason to expect anything different.

May '13 natural gas opened today at $4.418 and traded mostly sideways, ending the day down 0.004 at $4.414. Mid-Febraury had nattie futures trading over a full dollar lower than current levels and the contract has climbed incrementally ever since. Look for natural gas futures to remain at the top of the range with limited upside potential. But once price declines begin, the bottom could fall out in a hurry.

Photo credit: h.koppdelaney / Foter.com / CC BY-ND

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