With the majority of the Artic cold behind us (some fear remains for February, but latest models have shifted warmer), markets have been reinvigorated by recent speculation that sees oil climbing well beyond previous 2018 forecasts. Just in the past few weeks, 2018 crude forecasts went from $57 dollars to $62 to now $75 over the next three months and $82.50 in the next six months according to Goldman Sachs. This rebalancing of the oil markets is expected to continue increasing domestic oil production, which in turn, will increase associated natural gas production and assist in keeping a ceiling on natural gas prices.
Since the new oil forecasts were released, February weather models were also updated to reflect a much warmer outlook than previously reported. As a result, natural gas prices are correcting back toward three dollars with the prompt month contract losing 10.5% in just two days and currently trading below $2.90/MMbtu.
Last week, we experienced the second largest natural gas storage withdrawal on record (288 Bcf withdrawal) which pushed the expiring February contract close to an all-time high of $3.63. This week, the pull was not only much lower but below expectations at 99 Bcf with estimates calling for 102 Bcf. This confirms the recent cold weather’s effect on futures is limited to the near-term and cements the bearish market sentiment for 2018.
Power prices tend to be more reactive to natural gas markets and therefore have not experienced nearly as much volatility. The power markets that have more natural-gas fired generation will be more correlated, with New England and New York City carrying a three dollar per mega-watt hour spread to the upside on the twelve month strip since early January. Western PJM is showing less than a dollar move to the upside for the same period and strip.
Current Storage is 19.3% below last year and 16.2% below the five-year average