Natural gas futures, suppressed for most of July amid stronger production and supply surpluses, finished the month on a sour note.
At A Glance:
- Production holds atop 102 Bcf/d
- Weather demand eases slightly
- Analysts see low 30s Bcf injection
Coming off a 9.0-cent gain in its debut at the front of the curve – a rare rally in recent weeks – the September Nymex gas futures contract on Wednesday settled at $2.036/MMBtu, down 9.0 cents day/day.
NGI’s Spot Gas National Avg. in contrast, gained 17.5 cents to $1.805 as next-day cash buyers braced for heat waves.
Wood Mackenzie estimates showed production at 102.3 Bcf/d on Wednesday, up slightly from the 30-day average and well above spring lows in the 90s Bcf/d. The firm’s estimates this week have shown output approaching 103 Bcf/d – setting summer highs.
“Production is continuing to trend upwards, bringing bearish price pressure to the market as a whole,” analysts at Gelber & Associates said.
NatGasWeather said Tuesday’s gains were attributable “to oversold conditions” and “an exceptionally hot U.S. pattern” for early August as well as Freeport LNG’s recovery from Hurricane Beryl-imposed damage in July. Liquefied natural gas volumes averaged 12.6 Bcf/d on Wednesday, according to Wood Mackenzie, near seasonal highs and up substantially from July lows near 10 Bcf/d. Freeport’s rebound brought back about 2 Bcf/d of feed gas demand.
That noted, NatGasWeather added, traders turned their attention on Wednesday back to “plenty of elements to the bearish side, highlighted by hefty surpluses” of gas in storage and production that is “too strong.”
What’s more, while intense August heat remains widely expected, the firm said both the American and European weather models shed several cooling degree days leading into Wednesday’s trading. “Where most of the demand was lost was for the 10-15 day period due to weather systems impacting greater portions of the northern U.S.”
Storage Snapshot
The firm said the market will next focus on the government’s Thursday inventory data.
Analysts are looking for a roughly average injection with the U.S. Energy Information Administration’s (EIA) storage print covering the week ended July 26.
Estimates submitted to Reuters ranged from builds of 22 Bcf to 45 Bcf, with a median of 31 Bcf. NGI predicted a 29 Bcf injection. The prior five-year average increase was 33 Bcf.
EIA printed an injection of 22 Bcf natural gas into storage for the week ended July 19. The result surpassed analysts’ expectations for a build around 11-15 Bcf, according to major polls.
The increase for that period surged inventories to 3,231 Bcf, putting stocks far above the five-year average of 2,775 Bcf.
EBW Analytics Group ‘s Eli Rubin, senior analyst, said “the market remains engulfed in oversupply on a seasonal basis.”
He said there was still hope that a hot August could result in “tiny injections” and a reduction of the inventory surfeit. But if the change in forecasts Wednesday is “emblematic of an emerging cooling trend,” it would merit “near-term caution for Nymex gas.”
In the fall, Rubin said potential production declines and stronger LNG demand could reignite futures. He noted that major producer Chesapeake Energy Corp. this week said it was “totally prepared and willing and ready to do” curtailments in the second half of the year as it did in the spring. This followed similar messaging from EQT Corp. The companies are the two largest U.S. producers of natural gas.
Additionally, Rubin said, “indications of stronger demand bids from European importers are building expectations of a tightening gas market. While European storage is 85% full (per Gas Infrastructure Europe), transportation lags suggest that cargoes bid for September and beyond may not arrive until the early heating season. A widening spread could pull Nymex natural gas higher, due to a technical correlation between U.S. and overseas prices.
“Fundamentally, however, a well-supplied North American market suggests that – absent an unexpected bullish catalyst” – remains top of mind for traders.
Reuters’ preliminary polling for the EIA storage report covering the week ending Aug. 2 produced injection expectations ranging from 11 Bcf to 39 Bcf. The estimates compare with a five-year average of 38 Bcf.
Physical Market
Cash prices climbed on Wednesday for the third time in as many sessions this week. Intensifying heat this week and expectations for a sultry month ahead empowered bulls in the physical market.
NatGasWeather said “hot high pressure will rule most of the U.S. with highs of upper 80s to 100s for very strong national demand” through the end of this week and into the first full week of August. “The cooler exceptions will be the Northwest and Great Lakes the next few days with highs of 70s-80s as weather systems bring showers, although these areas will also warm to the upper 80s to 90s late in the week.”
Farther out, from Aug. 7-14, the firm expects more of the same, with the hottest conditions spanning from California to West Texas. Parts of the Midwest could prove exceptions with highs from the 70s to lower 80s.
On Wednesday, KRGT Del Pool in Nevada surged 53.0 cents day/day to average $2.385, while SoCal Citygate spiked 70.0 cents to $2.740, and PG&E Citygate in Northern California jumped 59.0 cents to $3.745. Beginning Thursday, Portland General Electric California Gas Transmission plans to conduct repair and upgrade work on its Redwood path, affecting southbound flow toward San Francisco.
Elsewhere, Opal in the Rockies rose 21.0 cents to $1.880, and Houston Ship Channel gained 12.5 cents to $1.730.
AccuWeather meteorologist Alex Sosnowski said Wednesday a tropical wave was tracking over the Atlantic Ocean with the potential to develop into a strong storm before approaching Florida late this week or early next.
“During the summer and autumn, low pressure areas known as tropical waves move from the Indian Ocean across Africa then the Atlantic,” Sosnowski said. “Of these, a small number go on to evolve into tropical depressions, tropical storms and hurricanes.” However, “August marks a time when the number of tropical waves that organize tends to increase substantially, as this is a time when water temperatures reach their maximum,” creating a key storm catalyst.
Meanwhile, Wood Mackenzie analyst Alex Sealy noted that, throughout next week, ANR Pipeline Co. planned “a slew of maintenance events” that could have “a significant effect on flows in the Southeast.” Three separate projects could limit flows by 167,000 MMBtu/d up to 325,000 MMBtu/d.
NGI’s Southeast Regional Avg. on Wednesday advanced 5.5 cents to $2.115.
