By Barani Krishnan

According to Investing.com, bulls are expecting this winter’s pricing to be anywhere from $7-$20 per head. This is because of concerns about low fuel storage and overwhelming production.

Yet, the U.S. Energy Information Administration expects Henry Hub’s spot contract on the New York Mercantile Exchange to hover just under $6 per mmBtu, or million metric British thermal units, for December through January. It expects that gas prices will rapidly fall to $3.50 per mmBtu by May 2022.

The reason? America’s primary energy agency thinks the country’s natural gas production will rise beyond January and that exports of LNG, or liquefied natural gas, will slow despite red-hot demand anticipated for the shipped version of gas.

The EIA’s projections hardly fits the fervor of gas bulls who think the fuel is at the cusp of a structural longer-term rally, just like crude oil.

However, the reality is that gas rallies have slowed in the last few weeks.

For the just-ended week, Henry Hub’s spot contract fell 2.8%, extending the near 1% decline in the previous week.

It seems that the momentum which drove prices to near $6 in October’s early days has disappeared. For example, during the week ended Sept. 24, Henry Hub’s spot contract jumped 9.3%.

Still, gas prices have risen 114% over the past year. However, we now have a more stable market with lower intraday movements within the $5.50-5.70 range due to benign weather. Larger weekly US storage injections and the global diplomacy of Vladimir Putin on gas are all antidotes to earlier rallies. 

Friday’s low was actually $5.40, though that was still above Tuesday’s $5.17 that marked October’s bottom so far.

What’s surprising with Friday’s slump is that it came on the back of EIA’s weekly update a day earlier that was clearly in the favor of bulls. Multiple analysts from energy agencies and consulting firms, as well as traders, had projected an average infection rate of 94 BCF, which is a billion cubic feet into storage. EIA revealed a decrease of almost 14% in storage build, with a report of 81 bcf.

Henry Hub’s spot contract rocketed from an intraday low of around $5.60 to $5.96 on the EIA storage report, the closest it came to recapturing the much-prized $6 handle. Yet, barely 24 hours later, it was down more than 50 cents on the day – a hefty plunge even by gas’ extraordinary volatility of late. 

Presciently, the EIA’s STEO – or Short-Term Energy Outlook published on Oct 15, a day prior to its storage update – said swings will continue even if winter demand for heating spikes beyond expectations and inventories become even more critically short.

“We expect the Henry Hub spot price will average $5.80/MMBtu in fourth-quarter 2021, which is $1.80/MMBtu higher than we forecast in the September STEO,” the EIA said.

But instead of $6 and above, it expected the spot price to see “a monthly average peak of $5.90/MMBtu in January”.

Further on, the EIA said in its latest STEO that it expected the spot price to “generally decline through 2022, averaging $4.01/mmBtu for the year amid rising U.S. natural gas production and slowing growth in LNG exports.”

The average production was expected to increase to 94 bcf/day during winter and 96.4 bcf/day in 2022. 

The EIA said the catalyst for its bet was natural gas and crude oil prices, “which we expect to remain at levels that will support enough drilling to sustain production growth”. 

That line basically supports the adage in commodity markets that “higher prices are the cure to higher prices”. This logic explains why, beyond a certain point demand destruction occurs as poor consumers either ration their use of the commodities or flood the market with more commodity production.

The EIA’s rationale, however, flies in the face of most gas bulls who think the United States will practically be incapable of adding meaningfully to production in the coming winter or anytime soon in 2022 due to self-imposed curbs on excessive drilling by most companies in shale patches now.

Some analysts are veering the EIA’s way though, predicting that balmy weather in the near-term – hardly the sort of condition typical in mid-to-late October – could add to pressure on prices despite the gas/LNG supply crunch in Europe.

“Our early forecast for an injection back in the 90 bcf range in the next report will keep the trend of larger-than-normal storage increases alive,” said Dan Myers of Houston-based Gelber & Associates, one of the consultancies that’s less positive on the market. 

The current supply-demand trend will “keep a lid on prices as long as the regime of warmer than normal October weather remains in place”, Myers added.

According to weather forecasting services, meaningful cold is expected to arrive at least another month after the predicted date.

“We continue to look to the end of October and early November for more impressive cold shots into the U.S. but where the overnight data failed to trend any colder,” NatGasWeather said in a projection carried by the naturalgasintel.com portal.

According to naturalgasintel.com, the forecaster noted that the European model had a longer range and favors warmer patterns over the lower 48 until mid-November.

Bespoke Weather Services also offered similar assessments to the portal. The firm said the overnight models were “just a tick cooler” and the below-normal demand pattern remains firmly in place overall. Data showed that there was more variation in the last third of the month which allowed cooler troughs through the Midwest, East and West.

There is “no true cold air source’” to tap into, according to Bespoke, as the Pacific side of the pattern remained “very hostile” toward any cold air delivery into the United States. Nonetheless, this was a “notable step change” compared to a couple of days ago.

“We view this as a window of variability,” said Bespoke. The forecaster is still favoring warmer weather to win out heading into early November, “though we will continue monitoring the blocking, as that poses risks to the warm view if it continues to be underplayed by all of the model guidance.”

The weather analysts, forecasters and EIA may all have misread the coming cold, gas demand/inventory, and could be wrong. The pre-winter play is something we will soon find out.

Oil Market & Price Roundup

Oil bulls scored an eight straight winning week as Brent hit $85 per barrel, nearing Wall Street’s $90 call, as strong U.S. retail sales and a rebounding stock market fed risk appetite despite exploding inflation.

News of China cutting crude oil import quotas by independent refiners as well as U.S. inventory numbers from Thursday point to a third week of crude stockpile growth were cancelled. 

On Friday, the White House declared that Covid-19 restrictions on travel for full-vaccinated foreign citizens will be lifted effective Nov. 8. This should help boost demand for jet fuel. 

Also ringing in oil bulls’ ears were the International Energy Agency’s estimate on Thursday that the energy crunch would leave the global market short of 500,000 barrels per day — estimated by some to be as high as 700,000 bpd.

“It will take a trifecta of events to derail this oil price rally: OPEC+ unexpectedly boosts output, warm weather hits the northern hemisphere, and if the Biden administration taps the strategic petroleum reserves,” said Ed Moya, analyst at online trading platform OANDA.

U.S. crude’s benchmark settled up 97 cents, or 1.2%, at $82.28 per barrel. It reached $82.48, the highest level since 2014. WTI rose 3.7% over the course of the week. This gave the U.S. benchmark crude oil an 8-week gain, a gain totaling 32%. WTI increased almost 70% over the past year. 

London-traded crude, the global benchmark for oil, settled up  68 cents, or 1%, at $84.86 after a three-year high at $85.09. Both Goldman Sachs (NYSE:) and Morgan Stanley  have called for $90 Brent before the end of the year.

Brent increased 3% for the week. That’s a six-week streak of gains that has resulted almost in 17% cumulative gain. Brent increased 64% over the past year.

Oil’s latest run-up also came after US numbers for September released by the Commerce Department on Friday showed a growth of nearly 14% on the year and a steady monthly expansion of 0.7% since August.

Calendar for Energy Markets

Monday, October 18

Estimates of crude Cushing inventory (private).

Tuesday, October 19

Weekly update on oil stockpiles

Wednesday, Oct 20

EIA weekly reports

EIA weekly reports

EIA weekly reports  

Thursday, October 21

EIA weekly reports

Friday, October 22

Baker Hughes Weekly Survey

Gold Market & Price Roundup

With any celebrations in the early days, it seems that the gold bull will be doomed.

Shortly after feeling euphoric at being able to recover its $1,800 position, yellow metal lovers were pushed back into mid-$1,700 territory Friday. Strong September U.S. retail sales led to an increase in speculation that Fed might have to raise interest rates more quickly than planned.

U.S. gold futures’ most active contract, , settled at $1,768.30 per ounce on New York’s Comex, down $29.60, or 1.7%. Session low was $1,765.10. There was only one consolation: the 0.6% weekly increase.

Just on Thursday, gold reached almost $1,802, crossing $1,800 the first time since Sept. 15, as it appeared to finally live up to its label as an “inflation hedge” and “safe-haven” days after oil prices hit seven-year highs above $80 per barrel.

But any illusion that the yellow metal would extend its two-day run-up to reach north of $1,900 and — eventually — the $2,000-plus record highs of August 2020 seemed put paid for now.

“Gold was unable to hold onto the $1800 level after a better-than-expected retail sales report and strong round of earnings sent U.S. Treasury yields higher, denting appeal to non-interest-bearing assets,” said Ed Moy, analyst at online trading platform OANDA.

While gold was ripe for profit-taking after its surge to $1,800 levels, “the downward move could extend if Wall Street continues to pump up equities”, Moya noted.

Higher September retail sales boosted the gains of the, already having its highest day in seven years in the previous session.

“Gold bulls still need to be patient,” added Moya. “Gold appears poised to consolidate here, but the start of a new bullish trend is around the corner once the global economic recovery gets on track and the dollar loses its dominance.” 

DisclaimerBarani Krishnan doesn’t hold any positions in securities and commodities that he discusses.