Storage Injections Grew; but May not Reach Historic Levels
Gas Storage levels continued to grow at strong levels. But the injection season is coming to an end. With only 4 weeks remaining, it will be a challenge to climb back to last year’s storage levels or the 5-year average storage levels. In order to fill the caverns and reach the 3,400 Bcf level, we need to see weekly injection levels of over 82 Bcf for the remainder of October. Record high production and continued mild weather contributed to the strong injections in September.
Weather Forecast : Above Average Temperatures for Most of the Country
For the Lower 48 States, the three month forecast predicts above normal temperatures. Only New Mexico and western Texas are predicted to see below average temps. In October, both coasts are expected to experience above normal temperatures, with only the upper Midwest to see below normal temperatures.
Weather for October does not appear to be a major factor in energy prices. Based on weather predictions alone, energy prices should remain flat through October. However, November is the beginning of winter and when the markets will begin reflect increased weather volatility. While weather is predicted to be above normal in November and December, the markets will likely react sharply to weather changes; let’s not forget how quickly the market changed on last years’ December weather.
Don’t wait until November to lock in this winter’s natural gas prices. Market adjustments to weather changes may be swift and sharp.
EC-Equal Chance for A.N.B. A- Above N- Normal B - Below
September Natural Gas Prices Up Only 14 Cents; the Same for October
September Natural Gas 12-month strip prices began at $3.823/MMBTU and ended at $3.957/MMBTU with a few ups and downs along the way. October trading began at $4.003/MMBTU.Factors contributing to the bearish outlook are all-time high gas production,above normal storage injections and mild temperatures. Optimism is dampened with the larger remaining storage deficit and all-time high exports to Mexico. Overall these factors look to balance each other and analysts predict normal prices for October.
As winter approaches, it brings the cold temps and also price volatility. The EIA’s chart below looks at Implied Volatility (IV) vs. Actual Volatility. Implied Volatility helps analysts calculate the probability of market movement. In general, IV increases when the market is bearishand decreases when the market is bullish. The common belief is that bearish markets are more risky than bullish markets. The chart below is a reminder of last winter’s market volatility. As a reminder, natural gas prices rose 26% from November 2013 to March 2014.
Bottom Line: Short-Term Natural Gas Prices Remain Flat - Let's Not Forget Last Winter
It’s October and winter is just a few weeks away. The good news is the predicted above normal temperatures should keep gas prices stable in October. The concerning news is that November is coming, along with it the normal colder weather, but also potential for having storage levels under the 5-year average.If we experience colder than expectedtemperatures in November, energy markets could start to take off.
Per EIA, Henry Hub natural gas spot prices averaged $3.73/MMBTU in 2013, and are expected to average $4.46 in 2014 and $3.87 in 2015.
October is a great time to lock in this winter’s gas prices. Waiting is the risky option.
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