Thanks to the return of the Polar Vortex in the Midwest, temperatures (with the wind chill) are now hitting -30 degrees once again. Although this doesn’t appear to be quite as bad as the first round of the Vortex, such extreme temperatures look to keep heating demand high, and have a huge impact on natural gas.
After all, with nearly half of all Americans using natural gas for heating purposes, it shouldn’t be too much of a surprise to note that recent natural gas reports have shown massive drawdowns in the supply of the key fuel. In just the last four reports, two have been fresh records, with an average drawdown in supplies of over 194 billion cubic feet.
Thanks to this huge use of this key fuel, prices for natural gas have been skyrocketing. Natural gas futures were approaching $5.5/mmBtu, a gain of roughly $1.5 in just a few short weeks.
This level actually represents a four-year high for the fuel, and helped to make natural gas one of the best performers to start 2014. However, as is usually the case for natural gas, big rallies are short-lived, especially given the calls for ‘warmer’ weather across much of the nation in February.
Forecast and Market Specifics
The outlook for the weather in February appears to be relatively normal across the East Coast. In fact, a few regions are actually looking for higher-than-average temperatures, which could reduce natural gas demand.
Additionally, the furious pace of natural gas’ rise over the past few weeks has led some to cash in their positions, particularly given the higher prospect for muted demand along the East Coast.
“The market’s collapsed after pushing up to a four-year high,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut for a Bloomberg article. “We’re going to see some volatility, with prices basically being pushed and pulled by the weather patterns.”
It also didn’t help that the NYMEX hiked margins for speculators holding front-month natural gas futures. The increase went from $2,750/contract to $3,300/contract and became effective at the end of the business day on Monday (see all the Energy ETFs here).
This boost in requirements, along with the weather forecast, probably helped to push some of the more leveraged traders out of natural gas for the time being. The impact of these factors was pretty severe on prices too, as front month futures tumbled to below $4.95 on the day, representing a 23.7 cent drop per contract.