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Energy & Precious Metals - Weekly Review and Calendar Ahead

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·10-min read
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By Barani Krishnan

Investing.com - Natural gas bulls have penciled in anywhere from $7 to double-digit pricing for this winter as worryingly low storage and underwhelming production of the fuel contrasts with expectations for bone-chilling cold.

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. From there, it expects gas prices to rapidly decline, to around $3.50 by May 2022.

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.

The reality though is that the intensity of the gas rally has slowed over the past couple of weeks.

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

The momentum that took gas to mid-$6 levels in the early days of October seems to have vanished. For example, during the week ended Sept. 24, Henry Hub’s spot contract jumped 9.3%.

Gas prices are still up 114% on the year. But what we have now is a choppier market, with smaller intraday moves within the $5.50-$5.70 range as benign weather, larger weekly injections into US storage and global gas diplomacy waged by Russian leader Vladimir Putin form an antidote to the earlier rally.

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 storage update a day earlier that was clearly in the favor of bulls. Analysts at multiple energy agencies, consultancies and trading shops had forecast an average infection of 94 bcf, or billion cubic feet, into storage. The EIA reported a build of just 81 bcf - almost 14% below forecast.

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.”

Production itself was forecast to rise to an average of 94 bcf per day during the winter, and average 96.4 bcf daily during 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”. The logic is that beyond a point, demand destruction sets in as impoverished consumers ration use or supply floods the market as producers try to benefit even more by mass producing the commodity.

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.

Weather forecasting services seem to be in agreement that meaningful cold will take at least another month to arrive.

“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.

The forecaster pointed out that the longer-range European model favored a warmer-than-normal pattern over much of the Lower 48 into mid-November, naturalgasintel.com said.

Bespoke Weather Services offered a similar assessment 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. The data found more variability into the final third of the month, allowing cooler troughs to swing through the Midwest and East.

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.”

Of course, the weather forecasters, analysts and the EIA could all be misreading the coming cold and gas demand/inventory situation. We shall know with time what the pre-winter play will be.

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 having cut crude oil import quotas for independent refiners and U.S. inventory data from Thursday pointing to a third straight weekly build in crude stockpiles were put on the backburner.

In focus was a White House announcement on Friday that it will lift Covid-19 travel restrictions for fully vaccinated foreign nationals effective Nov. 8, a development that should boost jet fuel demand.

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 U.S. West Texas Intermediate crude benchmark settled up 97 cents, or 1.2%, at $82.28 per barrel. Earlier in the session, it peaked at $82.48, its highest since 2014. For the week itself, WTI rose 3.7% for an eight-straight weekly gain that gave the U.S. crude benchmark a cumulative gain of 32%. For the year, WTI was up almost 70%.

London-traded Brent 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:GS) and Morgan Stanley have called for $90 Brent before the end of the year.

Brent rose 3% on the week, for a sixth straight weekly gain that resulted in an accumulated gain of almost 17%. For the year, Brent was up 64%.

Oil’s latest run-up also came after US retail sales 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.

Energy Markets Calendar Ahead

Monday, Oct 18

Cushing crude inventory estimates (private)

Tuesday, Oct 19

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Oct 20

EIA weekly report on crude stockpiles

EIA weekly report on gasoline stockpiles

EIA weekly report on distillates inventories

Thursday, Oct 21

EIA weekly report on natural gas storage

Friday, Oct 22

Baker Hughes weekly survey on U.S. oil rigs

Gold Market&Price Roundup

The gold bull seems doomed with any early celebration these days.

After brief euphoria at having reclaimed its $1,800 perch, those long the yellow metal were hurtled back into the mid-$1,700 territory on Friday as strong U.S. retail sales for September led to a renewed spike in bond yields on speculation that the Federal Reserve might be forced to raise rates faster than it intends.

U.S. gold futures’ most active contract, December, settled at $1,768.30 per ounce on New York’s Comex, down $29.60, or 1.7%. The session low itself was $1,765.10. The only consolation was the weekly gain of 0.6%.

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.

The higher September retail sales extended gains on the S&P 500, which already had its best day in seven months 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.”

Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.

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