The United States has seen a winter with warmer than average temperatures and, consequently, gas stocks have slumped back to their previous low level. Futures prices at the Henry Hub in February 2019 have fallen from $3 per million British thermal units from its peak of $4.80 in middle of November.
Gas stocks saw a large rally in the summer and autumn of 2018, but prices have fallen back to their original low – which has plagued the energy sector for the past three years. During the 2018/2019 cycle, consumption of energy was 6 per cent higher than average; however, since the milder winter set in four weeks ago, average prices were 4 per cent lower than usual.
A Matter Of Production
A surge in gas price from October to mid-November encouraged electricity producers to switch from gas to coal. Gas-fired generators were run for fewer hours in the fourth quarter and cheaper coal used instead, making low stores of gas go further.
The scarcity of gas stores was announced by the US Energy Information Administration, stating that the mid-December underground stock of gas was 20 per cent lower than the average for this time of year. However, this deficit was reduced to 14 per cent by the milder winter, as the capacity of gas generators were reduced.
The Influence Of Fund Managers
Back in October, US natural gas stocks were going into the winter with their lowest price for fifteen years; a small price rise was truncated by the high probability of an El Nino event, which causes the West Coast of the United States to experience a milder than average winter.
Hedge fund managers seemed to have been savvy about the predictions of a milder winter, further exacerbating the price drop. Between July and mid-November, hedge fund managers were the net buyers of futures and options, especially gas stocks.
However, as electricity produced by gas slowed and with US Federal predictions about a mild winter continuing, fund managers became net sellers – further plunging gas stocks to their new low.