A Natural Gas Red Flag

Natural gas prices settled slightly down on the day after some heavy selling into the settle. The result was a week where the November natural gas contract was little changed, reversing mid-week.

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The selling into the settle did not surprise, however, as we noted through the entire day that the natural gas strip was lagging. Though the winter contracts led us higher mid-day, much of the 2018 strip was lower through the day, and settled with even more significant losses than we saw at the front. On a weekly basis, too, only the winter contracts saw any gains. 

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The natural gas market is thus still clearly concerned about storage balance heading into the winter, and the market is tight. However, bearish medium-range weather expectations have taken their toll, as we expect very mild weather across the country next week to kill natural gas demand. As a result, the prompt month November contract has been lagging significantly against December contract. 

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This is not without historical precedent, either, as we have seen this spread widen dramatically in years with very warm Octobers. 

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Additionally, already weak Henry Hub cash prices through the week have limited the November contract, and minimal weather-driven demand next week will do little to help. 

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Over the past couple of months, we have seen a strong natural gas strip amidst structural tightness support the front of the strip higher, even when weather appeared quite bearish at times. Today, however, that supportive strip was no longer there. Later contracts declined and seemed to hold the front of the strip back. Market tightness can only do so much, as this time of year weather begins to increasingly matter as heating loads increase. In the context of lagging backs, natural gas bulls need help more now than ever from the weather, otherwise we could see X/Z widen even further.

Over the weekend, we will see our first burst of heating demand as well with seasonal temperatures. We expect scrapes and demand estimates to tell what the market balance is come Monday when we do not have large late-season cooling loads, like we have seen this week. Throw in this added attention that we now have to the weather with lagging backs, and we can expect an exciting Monday.