Natural gas prices were weak yesterday after reports of heavy production in the Gulf of Mexico Producing Region. Furthermore, the latest 6-10 day weather forecasts place temperatures in the Midwest and the East Coast much above normal, reducing the chances of another weather-related boost like the one seen in prices last week.
Yet front month Nymex Henry Hub prices settled above the 3.800 barrier for the ninth time out of the eleven sessions since they first crossed it on February 24th.
The answer is not that traders are betting the weather forecasts will be wrong, but rather that industrial demand, which is not nearly as dependent on weather, will remain strong.
Consider the amount of natural gas consumed by the power generating sector, which spiked to highs of 15.75 million dekatherms per day in February, 14.70% above the highs of 2010. In March, 2011’s high so far of 11.90 million dekatherms/d is only 1.71% above last year.
On the other hand, consider the load from industrial users. The North East Electricity Coordinating Council (NPCC) National Energy Reliability Council (NERC) region (which covers states north of New York) saw industrial demand in February peak at 13.23 thousand dekatherms per day, 109.07% above 2010’s peak. Unlike the power sector, March’s peak of 12.80K dekatherms per day for industrial use is 134.01% above 2010’s peak.
Even larger regions such as the Southeastern Electric Reliability Council (SERC) region, which covers Virginia down to Georgia and points further west, see strength. Peak usage from industrial users in SERC in February came to 941.6K dekatherms of natural gas per day, 52.33% greater than February 2010. In March, the peak of 832.72K dekatherms stands at a firm 21.97% above last year.
The bottom line is that the domestic manufacturing-led recovery is soaking up some of the new Bcf of natural gas being produced. This has the implied effect of creating a bottom around the 3.800 mark in the shoulder months (see March to May of 2010). Unfortunately, this recovery is being met with ever higher production and a long term decline in residential natural gas use, which is creating a top for natural gas futures between 5.000 and 6.000.
Analysts at The Schork Report advise clients that we expect sideways trading for the foreseeable future.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.