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Natural gas prices got a big boost at the start of the week. Are we looking at a new weather-led rally?

Natural gas trading

Cold winds heat up natural gas price action

There were hints the natural gas rally was over. Prices had fallen away from early October’s three-year highs. The game was up, despite record-high wholesale prices in Europe. But then Monday rolled around, and Henry Hub prices were shooting up again.

Natural gas gained 11% on Monday, taking futures above the $6.10 mark for the first time since the start of the month. Prices peaked at around $6.20. As of Tuesday, action had cooled a little, with Henry Hub futures trading for around $6.05.

Is natural gas back?

The weather plays a huge role in natural gas markets. Dedicated forecast services exist just to track weather patterns relevant to gas consumption and demand. Well, the latest predictions are in and they’ve painted a brighter demand picture for gas than previously thought.

The National Oceanic and Atmospheric Administration’s (NOAA) Climate Prediction Centre released its official winter outlook earlier this week. It has confirmed that La Niña conditions will be in place from December to February.

Remember the Texas Freeze? We could be seeing that again. Cold air from Canada is expected to drift down through the United States and form what’s called a Ridge Trough pattern. There should be warmer than average temperatures in the Southwest and cooler than normal in the northeast and mid-West.

It’s this kind of weather pattern that led to Texas, and a substantial chunk of US natural gas infrastructure, ending up under snow and ice last winter.

We could see a repeat. The timing of the first freezing blast is everything. The NOAA expects the first Canadian cold winds to touch the US by early November then extend from there. One for your diary, gas traders.

Colder temperatures in these US regions should lead to higher demand, hence the massive price jump we saw at the start of the week. It’s the old supply and demand relationship.

Also helping support prices was a marginal increase in US natural gas rig counts. Gas rigs increased by 1 in the week ending October 15th. The total now stands at 99 operational units, according to Baker Hughes.

How do inventories look ahead of withdrawal season?

We are still technically in injection season until the end of the month. October 31st, Halloween aside, is the end of a sustained period of inventory building. Gas stockpiles should be rising in line with expected winter heating demand.

November is traditionally when injections stop and withdrawals begin.

So how are we looking in October 2021? US working gas in storage was 3,461 Bcf as of Friday, October 15, 2021, according to EIA estimates.

This is a 92 Bcf increase from the previous week. Stocks were 458 Bcf less than last year at this time and 151 Bcf below the five-year average of 3,612 Bcf.

From this point of view, it appears the US is still playing catch up. Remember much of its domestic production and transmission capability was shuttered in the wake of Hurricane Ida earlier in the year. That could play a big role in limiting injections this year, alongside higher export volumes for Asian and European clients.

There is still work to be done. Otherwise, the US could be looking at lower-than-needed supply levels. Bad news for consumers – good news for natural gas bulls.

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