Natural gas prices surged to a more than four-year high in panicky and volatile trading Wednesday, after the latest cold weather forecasts raised fears that the U.S. is heading for a potentially colder-than-expected winter with too little gas supply.
Futures for December settled up 18 percent at $4.837 per mmBtus but had been up as much as 20 percent in an early morning rush of panic buying. Prices also rose across futures contracts that that would cover the winter months through March, indicating that prices could be pressured all winter by dwindling supply, which is at a 15-year low for this time of year.
CME Group said trading in natural gas futures hit an all time daily volume record of more than 1.2 million contracts, as the price had its biggest one day jump in years. The price for the front month futures for Decemeber is now the highest since Feb. 26, 2014.
"Overnight, there was another round of cold trends, and that kind of lit the fuse and everything exploded," said Jacob Meisel, chief weather analyst at Bespoke Weather Services. "Some of the later overnight weather models trended much colder...the six to 10 and 11 to 15 day [forecasts] both saw rather significant cold trends. It wasn't like we were looking at periods of very major sustained warming. We've just been continually trending colder and colder."
Source: Bespoke Weather Services/Tropical Tidbits
Meisel said the price could get to $7 or $8 per mmBtus, if the months of December and January are very cold. "This looks like a capitulation move today, but if cold weather really takes off, the sky is the limit," said Meisel.
Just a few weeks ago, the market was expecting warmer weather for November and natural gas was trading at less than $3 in September. "This cold is widespread and goes deep into the heart of Texas and across the Midwest and Northeast," said John Kilduff, partner with Again Capital. "The extent and breadth of it caught the market off guard and got prices rallying significantly."
As forecasts have been adjusted for colder temperatures, natural gas prices have been on a tear, and are now up 49 percent since the start of November. Government data last week showed the amount of natural gas in U.S. storage facilities rose by 65 billion cubic feet to 3.208 trillion cubic feet, 15 percent below the year-ago level and 16 percent below the five-year average. That was also the lowest amount of gas in storage during a first week of November, since 2003, according to Kilduff.
"It looks like more of a short squeeze than anything else. There's more cold weather on the horizon. A couple of the weather forecasts strengthened," said Kilduff. "Any kind of cold weather blast early season like this is going to cause anxiety and concerns about really tight supply as we get deeper into the winter."
Mark Fisher, MBF Asset Management CEO, tied the volatile morning trading to the unwind of a popular hedge fund strategy.
"What's happened is you had a tremendous number of macro funds that...for years have been basically buying oil, selling natural gas, and traders have done tremendously well, and in no short period of time this trade has imploded, and I'm sure there's a ton of people getting margin called out of that trade. They're being forced to buy nat gas and sell crude oil, and that has added to this new debacle in energy," said Fisher in an interview on "Squawk Box."
The U.S. is the world's largest producer of natural gas, and gas prices have been tame in recent years. Gas prices were last above $4 per mmBtu in 2014, the year of the extreme cold weather, known as the 'polar vortex.'
"The March, April spread is blown out almost as much as the front month [futures contract]," said Gene McGillian of Tradition Energy.
"That suggests the market got flat footed...We haven't seen this type of price strength since the polar vortex and that came on the heels of bitter cold in the winter of 2013/14," said McGillian. "Here it is the middle of November, and we have an explosive situation primarily with extremely low storage levels and a reminder of what demand can be with a long, cold winter. That has created a volatile cocktail in the market."
Analysts said gas in storage fell as hot weather lingered into October, resulting in higher air conditioning use. Unlike other years, there was no break between air conditioning and heating use.
Some analysts say U.S. exports are adding to the storage shortfall. The U.S.exports gas in the form of liquified natural gas on ships, as well as via pipeline, to Mexico.