While the coldest weather in a decade blanketed the entire Midwest, the natural gas market was wearing shorts and a tee shirt last week. Temperatures with the wind chill reached a generation low, and heating demand soared. However, the natural gas market looked forward towards last Saturday's Groundhog Day which is traditionally the first sign of the spring season.
Before the cold descended on vast areas of the United States, the natural gas market gapped to the downside on Sunday, January 27 when trading opened for the week.
As the daily chart shows, the energy commodity closed on Friday, January 25 at $3.052 per MMBtu and traded to a low at $2.946 during the session. On January 27, the price opened at $2.888 and only made it to a high at $2.923 during the week leaving a gap of 3.5 cents on the chart.
In markets, price action tends to fill voids left on a chart, but that did not happen last week. As schools and businesses closed and millions huddled in their homes to avoid the cold, the demand for natural gas soared which will likely lead to a significant withdrawal from inventories next Thursday when the Energy Information Administration reports the weekly stockpile data. However, the price fell to a low at $2.73 per MMBtu last Friday and closed not far off the low of the session.
Natural gas is a combustible commodity when it comes to both its physical form and its price. In November, the price rose to its highest level since 2014 at $4.929 per MMBtu on the back of the lowest inventories in years and a cold start to the winter season. The reason for the price weakness over the past week in the face of bone-chilling cold is that spring is only six weeks away and that means that the demand for heating will recede. In March 2016, the price of natural gas fell to a bottom at $1.611 per MMBtu, and some market participants seem to believe that the price is now heading back towards that level.
The market for natural gas has changed dramatically over recent years. Discoveries of massive reserves in the Marcellus and Utica shale regions of the US have weighed on the price. At the same time, technological advances in extracting natural gas from the crust of the earth and fewer regulations have combined to lower the production cost. However, necessity is the mother of invention, and the demand side of the equation has increased commensurately. The primary input in the generation of electricity has shifted from coal to natural gas. Moreover, the US is now exporting natural gas in liquid form to consumers around the globe. Therefore, the demand side of the fundamental equation has kept pace with the supply side.
The natural gas market may have gotten a bit ahead of itself over the past week, and we could see a continuation of the up and down volatility that has dominated the market since the October high. The gap on the chart stands as an upside target for the price of the energy commodity, and we could see the $3 level again quickly if Mother Nature decides that there will be one or more blasts of cold weather in the US over the coming weeks. Fasten your seat belt in the natural gas market and always trade with stops as it offers the wide price variance that makes it one of the wildest rides in the world of commodities.