US natural gas in record expiry day spike as winter storm approaches

Quantum Commodity Intelligence - US natural gas futures saw a record spike ahead of the Feb22 contract expiry on Thursday, with prices up more than 70% at one point, according to exchange data.

NYMEX Henry Hub futures were trading at around $4.60 per million British thermal in late morning US time ahead of Thursday's expiry, up 8% on the day, before a wave of short covering kicked in, lifting prices to more than $7/mmBtu at one point.

At the peak, the contract registered a daily gain of 72%, the highest one-day spike ever.

"A crazy expiry squeeze in the Feb natgas contract. Not least considering inventories are only 1% below the five-year average," said Ole S Hansen, Head of Commodity Strategy at Saxo Group.

Trading on the CME was interrupted as the exchange employed 'calming measures' in the form of circuit breakers, which exchange operators trigger during periods of excessive price volatility to act as a 'speed bump' to slow down extreme price movements.

The February contract expired at $6.265/mmBtu, the highest front-month settlement since October, while Mar22 settled at $4.283/mmBtu, up more than 5% on the day. 

NYMEX Henry Hub prices were already in a firm upwards trend this week, initially on the potential for increased LNG demand from Europe, while a storm heading to the Northeast coast of the US added to the already bullish momentum with gas demand set to spike.

Storm

Winter Storm Kenan will develop into a powerful nor'easter over the western Atlantic beginning late Friday, bringing heavy snow, as strong winds and coastal flooding to parts of the East Coast, reported the Weather Channel.

Storm watches and warnings have been issued by the National Weather Service for Friday night and Saturday for areas near the coast from North Carolina to Maine. This includes Boston, Providence, New York City, Philadelphia and Norfolk.

A source said that Exchange Traded Funds (ETFs) and other financial players would typically exit a physical delivery futures contract well ahead of expiry, leaving the expiry to those who can make or take physical delivery.

However, money managers were said to be holding substantial short positions heading into the expiry, which may have sparked the scramble to close out those positions as prices spiked higher.

The Feb22 contract was thinly traded, as is normal on expiry day, which may have contributed to the record price spike, noted sources.

"We do not believe it was supported by fundamentals. The more likely explanation is that the rally reflected limited liquidity during short covering trades near the close as the February contract expired," said Goldman Sachs in a note. 

However, the Mar22 contract continued to track higher Friday, trading at $4.790/mmBtu, up over 12% on the day, and up more than 30% on the week.