NEW YORK Jan 27 U.S. natural gas futures for
February were down nearly 6.5 percent on Monday as investors
pocketed profits and sold the soon-to-expire front-month
contract after gains spurred by brutally cold weather across
much of the country.
The decline was the sharpest in 8 months and triggered
volatility throughout a market that had seen the largest rally
in 20 months the week prior.
Last week, heating demand caused front-month gas prices to
climb more than 5 percent early Thursday and more than 10
percent late Friday. Prices gained 20 percent for the week.
Temperatures in the U.S. Northeast are expected to moderate
in the coming days, but cold temperatures in the Midwest have
pushed cash natural gas prices in some regional markets to
The front-month February contract will expire on Wednesday,
further leading traders with long positions in the market to
sell their stake in it.
"The shorts were fearful and rushing for the exits as prices
climbed on Friday. Now it's the longs who are bailing before the
price drops further ahead of the contract expiration. The
volatility arises from the mismatch," said Tim Evans, an energy
analyst at Citi Futures Perspective.
MDA Weather Services forecast intense cold over the eastern
two-thirds of the United States for the next five days before
some warmer weather moves into the East and Southeast over the
next six-to-10-day period.
Temperatures in Chicago, the third-largest U.S. city, were
expected on Monday to reach a high of minus 3 degrees
Fahrenheit, with a wind chill making it feel more like minus 26
degrees, according to forecaster AccuWeather.com.
Front-month February natural gas futures on the New York
Mercantile Exchange closed down 33.5 cents, or 6.46
percent, at $4.847 per million British thermal units.
Cash prices on IntercontinentalExchange have continued to
rally in both the heavy-consuming New York region and the
benchmark Henry Hub in Louisiana.
At Henry Hub gas for Tuesday delivery rose 50
cents to $5.69, the highest level since January 2010. Late
trade differentials were done at an 85-cent premium to the NYMEX
price, up sharply from a 20-cent premium on Friday.
Next-day Henry Hub prices averaged $3.70 per mmBtu in 2013,
up from $2.77 in 2012.
Gas on New York's Transco Zone 6 pipeline
rose $31.28 to an $91.26 average per mmBtu on forecasts for more
cold to come to the region. The Northeast region saw record-high
prices of $120 average per mmBtu last week as heavy demand for
gas for heating strained the pipeline system.
In Chicago, gas on the citygate pipeline
rose $30.76 to $41.31 average per mmBtu, the highest price since
the natural gas began trading on the IntercontinentalExchange in
2001. The next highest price was $12.79.
VOLATILITY, SPREADS SPIKE
In technical trade, traders noted implied volatility, a key
component dealers use to price options, spiked above 84 on
Friday, the highest since September 2009.
Late on Friday, the CME Group Inc hiked initial
margin requirements on its benchmark Henry Hub natural gas
contract by 20 percent in response to the heightened volatility,
a move some traders said could fuel further short-covering.
Traders said the Relative Strength Index for the front month
on the NYMEX was in overbought territory. According to Reuters
data, it has been in overbought territory for the fourth day in
a row but was down a bit from Friday.
Midwinter prices have spiked against late winter and early
spring contracts, indicating that traders expect the market to
return to normal levels after the freeze.
The difference between February and March 2014 futures hit
25.5 cents, the highest since at least February 2008, while the
March-April 2014 spread reached 69.1 cents, the highest since
August 2009, according to Reuters data.
Withdrawals of U.S. natural gas storage are expected to
increase over the next several weeks due to the forecasts of
cold weather and heavy heating demand.
Early gas storage estimates for this week range from a draw
of 170 billion cubic feet to 239 bcf. That compares with a 191
bcf drop a year earlier and a five-year average decline of 162
bcf for that week. The U.S. Energy Information Administration
will issue that report on Thursday.
Nuclear plant outages, which create a draw on natural gas as
a substitute power source, were at about 2,600 megawatts on
Monday, down from 4,400 MW out on Friday. That compares with
10,300 MW out a year ago and a five-year average outage rate of