(Bloomberg) -- After benchmark U.S. natural gas prices tumbled 22% in the past week, you could be forgiven for thinking that traders would be gloomy. Yet many of them remain upbeat as they look past the selloff to a winter rally.
While the most-active futures contract on the New York Mercantile Exchange slumped below $2 per per million British thermal units in recent days, futures for delivery in December through March continue to trade above $3. Almost half of respondents in a Bloomberg News survey of traders and analysts say winter prices could rise even higher that, perhaps testing $4 or more, a level not seen for years.
That bullish outlook is essentially underpinned by two bets: That this time around we’ll see more normal weather conditions following two unusually mild winters, which will spur demand, and that cuts to domestic gas supplies arising from reduced U.S. shale oil output will continue. Taken together, those factors are seen ultimately eroding the glut that’s currently weighing on spot prices.
In other words, while gas futures for near-term delivery -- the “front end” of the futures price curve, in trading parlance -- have sold off, several months further out on the calendar, when Americans will be burning more gas to heat their homes during winter, they’re steady at far higher levels.
So dramatic is the drop in production of so-called associated gas that traders aren’t just making wagers on prices for next year but are inquiring about 2022 as well, an unusually long way off into the future, according to Samantha Dart, head of natural gas research at Goldman Sachs Group Inc.
“The sell-off in gas is mostly at the front end of the curve because of concerns in the physical market about excess inventories during a weak demand period,” Dart said in an interview. “You are not seeing a whole lot of liquidation” for 2021.
Twelve of 27 traders and analysts surveyed by Bloomberg News say futures prices may climb this winter beyond current indicated levels for the peak of the heating season, while nine predict prices will hold steady. The rest were bearish.
For the bears, the high inventory levels left over from last winter that have persisted through extreme heat this summer are a concern. Their fears were crystallized last week with the latest government data on U.S. stockpiles, which showed a bigger-than-expected jump to 3.614 trillion cubic feet as of Sept. 11, a record for the time of year.
Just two days before that inventory report, money managers had increased their bullish gas bets to a three-year high, U.S. Commodity Futures Trading Commission data show. The subsequent stockpile data triggered a swift selloff in New York futures, which plunged 9.9%.
Still, the weather, as always, will be the biggest single factor for the gas market. December through February will be 8% cooler than the same period a year earlier with 2,495 heating degree days, a measure of weather-driven gas demand factoring in population, primarily because of La Nina conditions, said Steven Silver, senior meteorologist for commercial forecaster Maxar. The South and East are expected to see another winter with warmer-than-normal temperatures, he said.
Increased global demand for liquefied natural gas is also sparking optimism. The flows of U.S. gas to LNG exports has rebounded since the worst effects of the coronavirus pandemic. On Friday that flow topped 8 billion cubic feet per day for the first time since the start of May, before slipping again this week amid an unplanned outage and after a tropical storm curtailed pipeline flows. The demand boost from a cold start to winter across Northeast Asia could be enough to lure more U.S. export cargoes, according to Energy Aspects, an independent research consultancy.
“That $3 mark is the tough nut to crack here, and I think we’ll easily do that,” Kilduff said on winter prices. “We could easily see us getting upwards of $5 to $7 this winter if things start off with a bang,” including some early season cold weather and continued demand for exports.
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