Forecasts for near-record cooling demand in the month ahead failed to propel natural gas futures forward on Friday, as export volumes were in question and production held at strong levels.
At A Glance:
- Production, LNG key wild cards
- Strong demand in store for July
- Storage surpluses further narrow
Coming off a 6.0-cent loss the prior session, the August Nymex gas futures contract on Friday settled at $2.601/MMBtu, down another 8.4 cents day/day.
NGI’s Spot Gas National Avg. was flat on the day at $1.755, leveling off after a slump earlier in the week.
NatGasWeather noted that, some sporadic gains aside, selling over the two weeks leading into Friday’s action was driven in part by softer liquefied natural gas feed gas volumes – owing to maintenance work – and production that topped 100 Bcf/d.
LNG demand slipped below 12 Bcf/d during the final week of June, down more than 1 Bcf/d from recent highs. Production held near or above the century mark during the week, meanwhile, up from spring lows in the mid-90s Bcf. At the same time “a steady barrage of pipeline” news, including repair projects in the Permian Basin that cratered West Texas cash prices, proved “mostly bearish,” NatGasWeather said.
StoneX Financial Inc.’s Thomas Saal, senior vice president of energy, also noted that trading activity was customarily light ahead of Independence Day. The July Fourth holiday lands on a Thursday, and Saal told NGI that, for many, that means a four-day weekend. Commercial demand is bound to wane late next week as a result.
“There just wasn’t enough going on to move the needle” in a bullish direction, Saal said.
But Mother Nature holds the potential to counter those factors in coming sessions, he added. “If July does turn out to be really hot, then things will pick up,” Saal said.
NatGasWeather said both the American and European models on Friday continued to forecast near record cooling degree days for the first half of July, with widespread coverage of high temperatures in the upper 80s to low 100s. The coming “pattern is still impressively hot and with strong to very strong national demand,” the firm said.
Additionally, NGI’s Pat Rau, senior vice president of Research & Analysis, said after several losses in recent sessions, the August contract was “rapidly approaching oversold territory” and was due “to get a short-term boost from technical factors.” He pegged $2.60 as a key support level, and the front month held around that threshold Friday.
Storage Implications
While Thursday’s U.S. Energy Information Administration (EIA) inventory report met expectations and did little to influence trading that day, analysts said the result was bullish for a market approaching the heart of summer weather and robust demand levels.
EIA printed an injection of 52 Bcf into natural gas storage for the week ended June 21 – well below the five-year average build of 85 Bcf.
“Compared to degree days and normal seasonality, this week’s report is 1.2 Bcf/d tight versus the prior five-year average,” Wood Mackenzie analyst Eric McGuire said Friday. “This is a loosening of 2.9 Bcf/d week/week. The previous five weeks averaged 3.8 Bcf/d tight.”
While the build boosted stocks to 3,097 Bcf and put storage 21% above the five-year average, the surplus to historic norms narrowed by two percentage points from the previous week and continued a steady trend that dates to early spring. The surplus had exceeded 40% in March following a mild winter.
The latest build was “indeed low” and the same goes for “this year’s hitherto injection of 838 Bcf, which is a meager amount given the seasonal norm is 953 Bcf” by this point in the cooling season, analysts at The Schork Report said.
For the next EIA storage report, analysts were anticipating another bullish result relative to historical averages. Early injection estimates submitted to Reuters for the week ending June 28 ranged from 13 Bcf to 76 Bcf, with an average of 41 Bcf. The estimates compare with a five-year average increase of 69 Bcf.
The next report is “expected to print a decently smaller versus normal build, while the following three builds are also expected to print lighter than normal to reduce surpluses from 528 Bcf to near 400 Bcf,” NatGasWeather said.
Spot Market
Cash prices varied by region on Friday but gains in the West, where temperatures were expected to rise next week, bolstered the national average. Gas traded Friday was for delivery Monday.
SoCal Citygate jumped 37.5 cents day/day to average $2.425, and SoCal Border Avg. advanced 26.0 cents to $2.195.
KRGT Del Pool in the Southwest spiked 34.5 cents to $2.290, while Northwest Sumas rose 33.5 cents to $1.550.
Limited supply flowing out of the Permian Basin to the West impacted pricing, according to observers on the online energy platform Enelyst.
NatGasWeather said that, for the week ahead, “strong high pressure will rule most of the southern two-thirds of the U.S. with hot highs of upper 80s to 100s, including highs of 90s well up the East Coast” at points. “The northern third of the U.S. will be nice to warm with highs of 70s and 80s as weather systems track through with showers.”
For the second week of July, the firm said even hotter conditions are in store, with highs of 80s to lower 90s over the northern markets and continued upper 80s to 100s over the southern United States. The most scorching temperatures are likely to stretch from the California deserts through the Southwest and Texas, the forecaster added.
NatGasWeather also said there was minimal near-term activity expected in the tropics. It noted on Friday a “weak tropical system currently tracking towards the southern Gulf of Mexico” that was “not expected to strengthen into anything formidable.
“However, a second system in the eastern Atlantic Basin has better chances of strengthening as it tracks toward the Caribbean Sea in the days ahead,” the firm added. “This second system will need monitoring as it has some potential to impact” the Lower 48.
Meanwhile, West Texas prices remained under pressure on Friday. Maintenance work and pipeline limitations in the Permian curtailed producers’ ability to unload excess gas, forcing them to pay to have it taken away and stored. This again resulted in negative prices on Friday, though hubs in the region recovered some ground.
Permian benchmark Waha gained $1.130 on Friday but still averaged negative $2.110.
Most of what is produced in the Permian is associated gas – fuel developed alongside oil. Crude production in the prolific basin is near record levels as U.S. companies remain highly active to meet strong global demand and favorable prices. This is why gas output in the region remains elevated even with limited takeaway capacity.
Hargreaves Lansdown’s Sophie Lund-Yates, lead equity analyst, noted Friday that Brent crude prices during the past week topped $85/bbl. “The trajectory in the very near future is more likely to be an upwards trend in the price,” she said, motivating producers to continue cranking out oil and gas.
